Model analysis of the link between interest rates and crashes

Kristijonas M. Broga, Eduardo Viegas and Henrik Jeldtoft Jensen

Physica A: Statistical Mechanics and its Applications, 2016, vol. 457, issue C, 225-238

Abstract: We analyse the effect of distinct levels of interest rates on the stability of the financial network under our modelling framework. We demonstrate that banking failures are likely to emerge early on under sustained high interest rates, and at much later stage–with higher probability–under a sustained low interest rate scenario. Moreover, we demonstrate that those bank failures are of a different nature: high interest rates tend to result in significantly more bankruptcies associated to credit losses whereas lack of liquidity tends to be the primary cause of failures under lower rates.

Keywords: Crisis; Finance; Modelling; Interest rates (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:457:y:2016:i:c:p:225-238

DOI: 10.1016/j.physa.2016.03.054

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