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A model of financial contagion with variable asset returns may be replaced with a simple threshold model of cascades

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  • Kobayashi, Teruyoshi

Abstract

I show the equivalence between a model of financial contagion and the threshold model of global cascades proposed by Watts (2002). The model financial network comprises banks that hold risky external assets as well as interbank assets. It is shown that a simple threshold model can replicate the size and the frequency of financial contagion without using information about individual balance sheets.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 124 (2014)
Issue (Month): 1 ()
Pages: 113-116

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Handle: RePEc:eee:ecolet:v:124:y:2014:i:1:p:113-116

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Web page: http://www.elsevier.com/locate/ecolet

Related research

Keywords: Financial network; Cascades; Financial contagion; Systemic risk;

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  1. Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
  2. Jan Lorenz & Stefano Battiston & Frank Schweitzer, 2009. "Systemic Risk in a Unifying Framework for Cascading Processes on Networks," Papers 0907.5325, arXiv.org, revised Jan 2010.
  3. Teruyoshi Kobayashi, 2013. "Network versus portfolio structure in financial systems," Discussion Papers 1307, Graduate School of Economics, Kobe University.
  4. Teruyoshi Kobayashi & Kohei Hasui, 2013. "Efficient immunization strategies to prevent financial contagion," Papers 1308.0652, arXiv.org, revised Dec 2013.
  5. Lenzu, Simone & Tedeschi, Gabriele, 2012. "Systemic risk on different interbank network topologies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(18), pages 4331-4341.
  6. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
  7. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
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