Inhomogeneous Financial Networks and Contagious Links

Hamed Amini () and Andreea Minca ()
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Hamed Amini: Department of Mathematics, University of Miami, Coral Gables, Florida 33124
Andreea Minca: School of Operations Research and Information Engineering, Cornell University, Ithaca, New York 14850

Operations Research, 2016, vol. 64, issue 5, 1109-1120

Abstract: We propose a framework for testing the possibility of large cascades in financial networks. This framework accommodates a variety of specifications for the probabilities of emergence of “contagious links” conditional on a macroeconomic shock, where a contagious link leads to the default of a bank following the default of its counterparty. Under general contagion mechanisms and incomplete information, the financial network is modeled as an inhomogeneous random graph, where the conditional probabilities of having contagious links depend on banks’ characteristics. We give different bounds on the size of the cascade through contagious links and derive testable conditions for this cascade to be small.

Keywords: systemic risk; default contagion; financial stability; interbank network; phase transitions; sharp threshold; complex networks; inhomogeneous random graph (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (25)

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