Systemic risk, maximum entropy and interbank contagion

M. Andrecut ()
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M. Andrecut: Calgary, Alberta, T3G 5Y8, Canada

International Journal of Modern Physics C (IJMPC), 2016, vol. 27, issue 12, 1-14

Abstract: We discuss the systemic risk implied by the interbank exposures reconstructed with the maximum entropy (ME) method. The ME method severely underestimates the risk of interbank contagion by assuming a fully connected network, while in reality the structure of the interbank network is sparsely connected. Here, we formulate an algorithm for sparse network reconstruction, and we show numerically that it provides a more reliable estimation of the systemic risk.

Keywords: Systemic risk; interbank contagion; maximum entropy (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0129183116501485

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