Efficient immunization strategies to prevent financial contagion

Teruyoshi Kobayashi and Kohei Hasui

Papers from arXiv.org

Abstract: Many immunization strategies have been proposed to prevent infectious viruses from spreading through a network. In this study, we propose efficient immunization strategies to prevent a default contagion that might occur in a financial network. An essential difference from the previous studies on immunization strategy is that we take into account the possibility of serious side effects. Uniform immunization refers to a situation in which banks are "vaccinated" with a common low-risk asset. The riskiness of immunized banks will decrease significantly, but the level of systemic risk may increase due to the de-diversification effect. To overcome this side effect, we propose another immunization strategy, counteractive immunization, which prevents pairs of banks from failing simultaneously. We find that counteractive immunization can efficiently reduce systemic risk without altering the riskiness of individual banks.

Date: 2013-08, Revised 2013-12
New Economics Papers: this item is included in nep-ban and nep-rmg
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Citations: View citations in EconPapers (7)

Published in Scientific Reports 4, 3834, 2014

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1308.0652

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