FINANCIAL CONTAGION IN LARGE, INHOMOGENEOUS STOCHASTIC INTERBANK NETWORKS

Nadine Walters, Gusti van Zyl () and Conrad Beyers ()
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Nadine Walters: Department of Actuarial Science, University of Pretoria, Private Bag X20, Hatfield, Pretoria 0028, South Africa
Gusti van Zyl: #x2020;Department of Mathematics and Applied Mathematics, University of Pretoria, Private Bag X20, Hatfield, Pretoria 0028, South Africa
Conrad Beyers: Department of Actuarial Science, University of Pretoria, Private Bag X20, Hatfield, Pretoria 0028, South Africa

Advances in Complex Systems (ACS), 2019, vol. 22, issue 02, 1-26

Abstract: We consider the fraction of nodes that default in large, stochastic, inhomogeneous financial networks following an initial shock to the system. Results for deterministic sequences of networks are generalized to stochastic networks to account for interbank lending relationships that change frequently. A general class of inhomogeneous stochastic networks is proposed for use in systemic risk research, and we illustrate how results that hold for Erdős–Rényi networks can be generalized to the proposed network class. The network structure of a system is determined by interbank lending behavior which may vary according to the relative sizes of the banks. We then use the results of the paper to illustrate how network structure influences the systemic risk inherent in large banking systems.

Keywords: Systemic risk; banking networks; large networks; core–periphery structures; inhomogeneous networks (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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DOI: 10.1142/S0219525919500024

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