Credit Risk Contagion and Systemic Risk on Networks

Marina Dolfin, Damian Knopoff, Michele Limosani and Maria Gabriella Xibilia
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Marina Dolfin: Department of Engineering, University of Messina, 98166 Messina, Italy
Damian Knopoff: CIEM CONICET and FaMAF—National University of Córdoba, Córdoba CP:X5000HUA, Argentina
Michele Limosani: Department of Economics, University of Messina, 98122 Messina, Italy
Maria Gabriella Xibilia: Department of Engineering, University of Messina, 98166 Messina, Italy

Mathematics, 2019, vol. 7, issue 8, 1-16

Abstract: This paper proposes a model of the dynamics of credit contagion through non-performing loans on financial networks. Credit risk contagion is modeled in the context of the classical SIS (Susceptibles-Infected-Susceptibles) epidemic processes on networks but with a fundamental novelty. In fact, we assume the presence of two different classes of infected agents, and then we differentiate the dynamics of assets subject to idiosyncratic risk from those affected by systemic risk by adopting a SIIS (Susceptible-Infected1-Infected2-Susceptible) model. In the recent literature in this field, the effect of systemic credit risk on the performance of the financial network is a hot topic. We perform numerical simulations intended to explore the roles played by two different network structures on the long-term behavior of assets affected by systemic risk in order to analyze the effect of the topology of the underlying network structure on the spreading of systemic risk on the structure. Random graphs, i.e., the Erdös–Rényi model, are considered “benchmark” network structures while core-periphery structures are often indicated in the literature as idealized structures, although they are able to capture interesting, specific features of real-world financial networks. Moreover, as a matter of comparison, we also perform numerical experiments on small-world networks.

Keywords: credit risk; random networks; core-periphery networks; complex systems; epidemic modeling (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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