Systemic risk and liquidity rescue in complex financial networks: Pit hole and black hole of liquidity

Yi He, Shan Wu and Mu Tong

Physica A: Statistical Mechanics and its Applications, 2019, vol. 536, issue C

Abstract: Using the payment settlement network as an example and constructing the liquidity circulation model in a complex network, the intrinsic mechanism of liquidity circulation is analyzed, and the function of different network nodes in liquidity circulation is studied by distinguishing between the spillover node and leaking node and the liquidity pit hole and liquidity black hole. After studying the different system risk scenarios under different network structures based on the simulation, this paper discovers that the smaller the differences between nodes and the closer the connections, the smaller the probability of systematic risk and the more serious the consequence when the risk is formed. This result is determined by the characteristics of network topology and the liquidity demand of the nodes affected by it. This study also finds that because the degree of systemic risk is positively correlated with the system’s liquidity gap, the rescue strategy based on using the nodes’ liquidity gaps to allocate the rescue fund is better and can achieve complete relief when the gaps are eliminated. When taking care to avoid liquidity pits, the rescue effect can be improved on the small rescue scale. In different systemic risk scenarios, the order of rescue also matters. When the risk is high, priority should be given to the participants with a smaller liquidity gap, when the risk is moderate, priority should be given to a balanced bailout, and there is only a trivial difference between the different rescue orders when the risk is small.

Keywords: Network topology; Systemic risk; Liquidity rescue; Payment system (search for similar items in EconPapers)
JEL-codes: C15 G21 G32 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437119306144
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:536:y:2019:i:c:s0378437119306144

DOI: 10.1016/j.physa.2019.04.241

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().