Resilience to Contagion in Financial Networks

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Title: Resilience to Contagion in Financial Networks
Author(s): Amini, H
Cont, R
Minca, A
Item Type: Journal Article
Abstract: Propagation of balance-sheet or cash-flow insolvency across financial institutions may be modeled as a cascade process on a network representing their mutual exposures. We derive rigorous asymptotic results for the magnitude of contagion in a large financial 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 in case of default have both large connectivity and a large fraction of contagious links. The asymptotic results show good agreement with simulations for networks with realistic sizes.
Publication Date: 1-Apr-2016
Date of Acceptance: 1-Mar-2013
URI: http://hdl.handle.net/10044/1/50633
DOI: https://dx.doi.org/10.1111/mafi.12051
ISSN: 0960-1627
Publisher: Wiley Periodical Inc.
Start Page: 329
End Page: 365
Journal / Book Title: Mathematical Finance
Volume: 26
Issue: 2
Copyright Statement: ©2016 The Authors. Mathematical Finance Published by Wiley Periodicals, Inc.This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivsLicense, which permits use and distribution in any medium, provided the original work is properly cited, the use isnon-commercial and no modifications or adaptations are made
Keywords: Social Sciences
Science & Technology
Physical Sciences
Business, Finance
Economics
Mathematics, Interdisciplinary Applications
Social Sciences, Mathematical Methods
Business & Economics
Mathematics
Mathematical Methods In Social Sciences
systemic risk
default contagion
random graphs
interbank network
financial stability
macroprudential regulation
BOOTSTRAP PERCOLATION
SYSTEMIC RISK
BANKING SYSTEMS
DEGREE SEQUENCE
RANDOM GRAPHS
TOPOLOGY
DIFFUSION
COMPONENT
MARKET
MODEL
q-fin.RM
q-fin.RM
math.PR
0102 Applied Mathematics
1502 Banking, Finance And Investment
Finance
Publication Status: Published
Appears in Collections:Financial Mathematics
Mathematics
Faculty of Natural Sciences



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