Mapping Systemic Risk: Critical Degree and Failures Distribution in Financial Networks

Matteo Smerlak, Brady Stoll, Agam Gupta and James Magdanz

PLOS ONE, 2015, vol. 10, issue 7, 1-15

Abstract: The financial crisis illustrated the need for a functional understanding of systemic risk in strongly interconnected financial structures. Dynamic processes on complex networks being intrinsically difficult to model analytically, most recent studies of this problem have relied on numerical simulations. Here we report analytical results in a network model of interbank lending based on directly relevant financial parameters, such as interest rates and leverage ratios. We obtain a closed-form formula for the “critical degree” (the number of creditors per bank below which an individual shock can propagate throughout the network), and relate failures distributions to network topologies, in particular scalefree ones. Our criterion for the onset of contagion turns out to be isomorphic to the condition for cooperation to evolve on graphs and social networks, as recently formulated in evolutionary game theory. This remarkable connection supports recent calls for a methodological rapprochement between finance and ecology.

Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0130948 (text/html)
https://journals.plos.org/plosone/article/file?id= ... 30948&type=printable (application/pdf)

Related works:
Working Paper: Mapping systemic risk: critical degree and failures distribution in financial networks (2014)
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:plo:pone00:0130948

DOI: 10.1371/journal.pone.0130948

Access Statistics for this article

More articles in PLOS ONE from Public Library of Science
Bibliographic data for series maintained by plosone ().