Abstract
We propose a framework for testing the possibility of large cascades in financial networks. This framework accommodates a variety of specifications for the probabilities of emergence of "contagious links" conditional on a macroeconomic shock, where a contagious link leads to the default of a bank following the default of its counterparty. Under general contagion mechanisms and incomplete information, the financial network is modeled as an inhomogeneous random graph, where the conditional probabilities of having contagious links depend on banks' characteristics. We give different bounds on the size of the cascade through contagious links and derive testable conditions for this cascade to be small.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 1109-1120 |
| Number of pages | 12 |
| Journal | Operations Research |
| Volume | 64 |
| Issue number | 5 |
| DOIs | |
| State | Published - Sep 1 2016 |
Keywords
- Complex networks
- Default contagion
- Financial stability
- Inhomogeneous random graph
- Interbank network
- Phase transitions
- Sharp threshold
- Systemic risk
ASJC Scopus subject areas
- Computer Science Applications
- Management Science and Operations Research
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Cite this
Amini, H., & Minca, A. (2016). Inhomogeneous financial networks and contagious links. Operations Research, 64(5), 1109-1120. https://doi.org/10.1287/opre.2016.1540