Risk contagion effects and stability analysis of complex financial systems with multilayer networks

Yi Ding, Chun Yan, Wei Liu, Xinhong Liu and Jiahui Liu

Mathematics and Computers in Simulation (MATCOM), 2026, vol. 245, issue C, 592-609

Abstract: The financial system is a complex system with multiple interconnected channels. In this paper, we propose a framework for default and distress contagion based on a multilayer network that allows risk to be transmitted before the institutional default. To this end, we first propose a multilayer network financial system based on interbank lending, cross-holdings and overlapping portfolios. The default contagion mechanism under the interaction of the three connections is investigated in this system and a valuation function for default contagion is given. We then introduce the concept of capital buffers, allowing risk contagion prior to default by constructing an asset valuation function during crises. Finally, we validate the influence of financial network characteristics on risk contagion and systemic stability through numerical simulations. This study can provide a theoretical basis for understanding the contagion of financial system risk in real-world financial systems.

Keywords: Financial multilayer networks; Systemic risk; Contagion; Financial stability; Stress testing (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eee:matcom:v:245:y:2026:i:c:p:592-609

DOI: 10.1016/j.matcom.2026.02.014

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