Financial Contagion in Cross-holdings Networks: The Case of Ecuador

Pablo Estrada and Leonardo Sanchez-Aragon

A chapter in The Econometrics of Networks, 2020, vol. 42, pp 265-292 from Emerald Group Publishing Limited

Abstract: Financial contagion refers to the propagation of shocks that can generate widespread failures. The authors apply a financial contagion model proposed by Elliott, Golub, and Jackson (2014) to a cross-shareholding network of firms in Ecuador. The authors use a novel dataset to study the potential channels for contagion. Although diversification is not high, results reveal enough conditions for a contagion event to occur. However, the low level of integration attenuates the effects of shocks. The authors run simulations affecting a particular firm at the time, and find that two firms coming from the finance and trade industry cause the highest contagion. In addition, when an entire industry receives a shock, trade and manufacturing industries contagion more companies than the rest. Finally, the model can assist policymakers to monitor the market and evaluate the fragility of the network in different scenarios.

Keywords: Financial contagion; cross-holding; network; cascade effects; F36; F65; G32; G33 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-905320200000042017

DOI: 10.1108/S0731-905320200000042017

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