Dynamical Macroprudential Stress Testing Using Network Theory

Dror Y. Kenett (), Sary Levy-Carciente (), Adam Avakian (), H. Eugene Stanley () and Shlomo Havlin ()
Additional contact information
Dror Y. Kenett: Boston University
Sary Levy-Carciente: Universidad Central de Venezuela, Caracas, Venezuela
Adam Avakian: Boston University
H. Eugene Stanley: Boston University
Shlomo Havlin: Bar-Ilan University, RamatGan, Israel

No 15-12, Working Papers from Office of Financial Research, US Department of the Treasury

Abstract: The increasing frequency and scope of financial crises have made global financial stability one of the major concerns of economic policy and decision makers. This has led to the understanding that financial and banking supervision has to be thought of as a systemic task, focusing on the interdependent relations among the institutions. Using network theory, we develop a dynamic model that uses a bipartite network of banks and their assets to analyze the system's sensitivity to external shocks in individual asset classes and to evaluate the presence of features underlying the system that could lead to contagion. As a case study, we apply the model to stress test the Venezuelan banking system from 1998 to 2013. The introduced model was able to capture monthly changes in the structure of the system and the sensitivity of bank portfolios to different external shock scenarios and to identify systemic vulnerabilities and their time evolution. The model provides new tools for policy makers and supervision agencies to use for macroprudential dynamical stress testing.

Keywords: Financial Networks; Interdependence; Contagion; Banking System; Venezuela; macroprudential (search for similar items in EconPapers)
Pages: 52 pages
Date: 2015-06-18
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

Downloads: (external link)
https://www.financialresearch.gov/working-papers/f ... ingNetworkTheory.pdf (application/pdf)

Related works:
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:ofr:wpaper:15-12

Access Statistics for this paper

More papers in Working Papers from Office of Financial Research, US Department of the Treasury Contact information at EDIRC.
Bibliographic data for series maintained by Corey Garriott ().