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 |
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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
Cite this
Inhomogeneous financial networks and contagious links. / Amini, Leo Hamed; Minca, Andreea.
In: Operations Research, Vol. 64, No. 5, 01.09.2016, p. 1109-1120.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Inhomogeneous financial networks and contagious links
AU - Amini, Leo Hamed
AU - Minca, Andreea
PY - 2016/9/1
Y1 - 2016/9/1
N2 - 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.
AB - 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.
KW - Complex networks
KW - Default contagion
KW - Financial stability
KW - Inhomogeneous random graph
KW - Interbank network
KW - Phase transitions
KW - Sharp threshold
KW - Systemic risk
UR - http://www.scopus.com/inward/record.url?scp=84991508485&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84991508485&partnerID=8YFLogxK
U2 - 10.1287/opre.2016.1540
DO - 10.1287/opre.2016.1540
M3 - Article
AN - SCOPUS:84991508485
VL - 64
SP - 1109
EP - 1120
JO - Operations Research
JF - Operations Research
SN - 0030-364X
IS - 5
ER -