Heterogeneity, Correlations and Financial Contagion
By Fabio Caccioli, T. Catanach, J. D. Farmer. 2011
134 citations recorded by the source corpus.
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.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/993830a4340a6b8ab29fdd62394bb16c56e1e409
Citations in the corpus
- Stability analysis of financial contagion due to overlapping portfolios (2012, unknown): “Although we do not expect different results from a qualitative point of view, it should nonetheless be possible to asses the relative stability of systems with different properties, similarly to what has been done for counterparty loss in [9].”
- Post-Mortem Examination of the International Financial Network (2012, unknown): “Furthermore, we also find evidence of nonlinear effects: in line with the recent theoretical models (Iori et al., 2006; Caccioli et al., 2011; Haldane and May, 2011), the high degree of heterogeneity that characterizes the IFN breaks down the monotone relationship between connectedness and…”