Hierarchical contagions in the interdependent financial network

William Barnett, Xue Wang, Hai-Chuan Xu and Wei-Xing Zhou
Additional contact information
Xue Wang: Institute of Chinese Financial Studies, Southwestern University of Finance and Economics, Chengdu, China and Department of Economics, Emory University, USA
Hai-Chuan Xu: Department of Finance and Research Center for Econophysics, East China University of Science and Technology, Shanghai, China

No 202113, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: We model hierarchical cascades of failures among banks linked through an interdependent network. The interaction among banks includes not only direct cross-holding, but also indirect dependency by holding mutual assets outside the banking system. Using data extracted from the European Banking Authority, we present the interdependency network composed of 48 banks and 21 asset classes. Since interbank exposures are not public, we first reconstruct the asset/liability cross-holding network using the aggregated claims. For the robustness, we employ 3 reconstruction methods, called "Anan, Hal‚a and Maxe". Then, we combine the external portfolio holdings of each bank to compute the interdependency matrix. The interdependency network is much more dense than the direct cross-holding network, showing the complex latent interaction among banks. Finally, we perform macro-prudential stress tests for the Euro- pean banking system, using the adverse scenario in EBA stress test as the initial shock. For different reconstructed networks, we illustrate the hierarchical cascades and show that the failure hierarchies are roughly the same except for a few banks, reflecting the overlapping portfolio holding accounts for the majority of defaults. Understanding the interdependency network and the hierarchy of the cascades should help to improve policy intervention and implement rescue strategy.

Keywords: financial network; interdependent network; contagions; stress test; macro-prudential. (search for similar items in EconPapers)
JEL-codes: D85 G01 G21 G32 G33 (search for similar items in EconPapers)
Date: 2021-06, Revised 2021-06
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www2.ku.edu/~kuwpaper/2021Papers/202113.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www2.ku.edu:80 (A connection attempt failed because the connected party did not properly respond after a period of time, or established connection failed because connected host has failed to respond.)

Related works:
Journal Article: Hierarchical contagions in the interdependent financial network (2022)
Working Paper: Hierarchical contagions in the interdependent financial network (2022)
Working Paper: Hierarchical contagions in the interdependent financial network (2021)
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:kan:wpaper:202113

Access Statistics for this paper

More papers in WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Professor Zongwu Cai ().