RESILIENCE TO CONTAGION IN FINANCIAL NETWORKS

By Hamed Amini, Rama Cont, Andreea Minca. 2011

331 citations recorded by the source corpus.

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.

Subfields: Finance, Statistical and Nonlinear Physics

View Paper: https://www.semanticscholar.org/paper/4781007bd2303b4305a4e127a459b4ca33d999ca

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Citations in the corpus

The future of risk assessment (2018, methodology): “Various models, methods and frameworks for analyzing and quantifying resilience have been proposed in the literature [45,69,82,117,198], with focus on diverse fields of application such as seismic engineering and structural systems [47,48,59], ecological systems [78], economics and financial systems”
Too Interconnected to Fail: A Survey of the Interbank Networks Literature (2015, background): “See Amini et al. (2013) for a generalization of their results. (31)Lee (2013) proposes a method for calculating systemic liquidity shortages in the network context.”
Heterogeneity, Correlations and Financial Contagion (2011, background): “One of the key problems in this context is that of understanding the role of the network structure in relation to the contagion effect, and a growing part of the literature in the field has been recently devoted to address this issue [1, 7, 8, 9, 10, 11, 12].”
Systemic Risk in Financial Networks: A Survey (2020, neutral): “Others are based on the underlying network of interbank contracts and rely on models of contagion via counterparty risk (Amini et al. (2016); Hauton & Héam (2016); Jackson & Pernoud (2019)).”
The Economic Consequences of Social Network Structure (2017, neutral): “For instance, one can provide a measure of resilience that allows for a given network to predict the spread of distress (Amini, Cont, and Minca (2012, 2016)).”
Efficiency and Stability of a Financial Architecture with Too-Interconnected-to-Fail Institutions (2017, result): “This finding supports the theoretical results in Amini et al. (2013) who compute that the two measures converge in large networks.”