Cascades in real interbank markets
Fariba Karimi and
No 1872, Kiel Working Papers from Kiel Institute for the World Economy (IfW)
We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted institution to start a cascade depends on an interplay of shock size and connectivity. Further results indicate that the ability to limit default risk by spreading the lending to many counterparts decreased with the financial crisis. To evaluate the influence of the network structure on market stability, we compare the simulated cascades from the empirical network with results from different randomized network models. The results show that the empirical network has non-random features, which cannot be captured by rewired networks. The analysis also reveals that simulations assuming homogeneity for the size of banks and loan contracts dramatically overestimates the fragility of the interbank market.
Keywords: interbank loan networks; systemic risk; cascades; null models (search for similar items in EconPapers)
JEL-codes: C15 E47 G01 G17 (search for similar items in EconPapers)
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Journal Article: Cascades in Real Interbank Markets (2016)
Working Paper: Cascades in real interbank markets (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1872
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