Economy – Quantitative Finance – General Finance
Scientific paper
2011-09-06
Economy
Quantitative Finance
General Finance
15 pages, 10 figures
Scientific paper
We consider a model of contagion in financial networks recently introduced in the literature, and we characterize the effect of a few features empirically observed in real networks on the stability of the system. Notably, we consider the effect of heterogeneous degree distributions, heterogeneous balance sheet size and degree correlations between banks. We study the probability of contagion conditional on the failure of a random bank, the most connected bank and the biggest bank, and we consider the effect of targeted policies aimed at increasing the capital requirements of a few banks with high connectivity or big balance sheets. Networks with heterogeneous degree distributions are shown to be more resilient to contagion triggered by the failure of a random bank, but more fragile with respect to contagion triggered by the failure of highly connected nodes. A power law distribution of balance sheet size is shown to induce an inefficient diversification that makes the system more prone to contagion events. A targeted policy aimed at reinforcing the stability of the biggest banks is shown to improve the stability of the system in the regime of high average degree. Finally, disassortative mixing, such as that observed in real banking networks, is shown to enhance the stability of the system.
Caccioli Fabio
Catanach Thomas A.
Farmer Doyne J.
No associations
LandOfFree
Heterogeneity, correlations and financial contagion does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with Heterogeneity, correlations and financial contagion, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Heterogeneity, correlations and financial contagion will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-93902