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RESILIENCE TO CONTAGION IN FINANCIAL NETWORKS

Mathematical finance, 2016-04, Vol.26 (2), p.329-365 [Peer Reviewed Journal]

2016 The Authors. Published by Wiley Periodicals, Inc. ;2016 Wiley Periodicals, Inc. ;Distributed under a Creative Commons Attribution 4.0 International License ;ISSN: 0960-1627 ;EISSN: 1467-9965 ;DOI: 10.1111/mafi.12051

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  • Title:
    RESILIENCE TO CONTAGION IN FINANCIAL NETWORKS
  • Author: Amini, Hamed ; Cont, Rama ; Minca, Andreea
  • Subjects: default contagion ; Economic theory ; Financial services ; financial stability ; interbank network ; macroprudential regulation ; Mathematics ; random graphs ; Studies ; systemic risk ; United States
  • Is Part Of: Mathematical finance, 2016-04, Vol.26 (2), p.329-365
  • Description: We derive rigorous asymptotic results for the magnitude of contagion in a large counterparty network and give an analytical expression for the asymptotic fraction of defaults, in terms of network characteristics. Our results extend previous studies on contagion in random graphs to inhomogeneous‐directed graphs with a given degree sequence and arbitrary distribution of weights. We introduce a criterion for the resilience of a large financial network to the insolvency of a small group of financial institutions and quantify how contagion amplifies small shocks to the network. Our results emphasize the role played by “contagious links” and show that institutions which contribute most to network instability have both large connectivity and a large fraction of contagious links. The asymptotic results show good agreement with simulations for networks with realistic sizes.
  • Publisher: Oxford: Blackwell Publishing Ltd
  • Language: English
  • Identifier: ISSN: 0960-1627
    EISSN: 1467-9965
    DOI: 10.1111/mafi.12051
  • Source: Alma/SFX Local Collection
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