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Structural contagion and vulnerability to unexpected liquidity shortfalls

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  • Giansante, Simone
  • Chiarella, Carl
  • Sordi, Serena
  • Vercelli, Alessandro

Abstract

This paper assumes that financial fluctuations are the result of the dynamic interaction between liquidity and solvency conditions of individual economic units. The framework is an extention of Sordi and Vercelli (2012) designed as an heterogeneous agent model which proceeds through discrete time steps within a finite time horizon. The interaction at the micro-level between economic units monitors the spread of contagion and systemic risk, producing interesting complex dynamics. The model is analysed by means of numerical simulations and systemic risk modelling, where local interaction of units is captured and analysed by the bilateral provision of liquidity among units. The behaviour and evolution of economic units are studied for different parameter regimes in order to investigate the relation between units’ expectations, liquidity regimes and contagion. Liquidity policy implications are briefly discussed.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 83 (2012)
Issue (Month): 3 ()
Pages: 558-569

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Handle: RePEc:eee:jeborg:v:83:y:2012:i:3:p:558-569

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

Related research

Keywords: Financial fluctuations; Contagion; Systemic risk; Heterogeneous agents; Complex dynamics;

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References

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  1. Krause, Andreas & Giansante, Simone, 2012. "Interbank lending and the spread of bank failures: A network model of systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 583-608.
  2. Markose, Sheri & Giansante, Simone & Shaghaghi, Ali Rais, 2012. "‘Too interconnected to fail’ financial network of US CDS market: Topological fragility and systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 627-646.
  3. Sébastien Vivier-Lirimont, 2004. "Interbanking networks : towards a small financial world ?," Cahiers de la Maison des Sciences Economiques v04046, Université Panthéon-Sorbonne (Paris 1).
  4. Douglas W. Diamond & Raghuram G. Rajan, 2002. "Liquidity Shortages and Banking Crises," NBER Working Papers 8937, National Bureau of Economic Research, Inc.
  5. Sordi, Serena & Vercelli, Alessandro, 2006. "Financial fragility and economic fluctuations," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 543-561, December.
  6. Serena Sordi & Alessandro Vercelli, 2010. "Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 1010, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
  7. Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, pages 611-640.
  8. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
  9. Vercelli, Alessandro, 2000. "Structural financial instability and cyclical fluctuations," Structural Change and Economic Dynamics, Elsevier, vol. 11(1-2), pages 139-156, July.
  10. Iori, Giulia & De Masi, Giulia & Precup, Ovidiu Vasile & Gabbi, Giampaolo & Caldarelli, Guido, 2008. "A network analysis of the Italian overnight money market," Journal of Economic Dynamics and Control, Elsevier, vol. 32(1), pages 259-278, January.
  11. Alessandro Vercelli, 2011. "A Perspective on Minsky Moments: Revisiting the Core of the Financial Instability Hypothesis," Review of Political Economy, Taylor & Francis Journals, vol. 23(1), pages 49-67.
  12. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
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Cited by:
  1. Passarella, Marco, 2011. "From the village fair to Wall Street. The Italian reception of Minsky’s economic thought," MPRA Paper 49593, University Library of Munich, Germany.
  2. Bargigli, Leonardo & Gallegati, Mauro & Riccetti, Luca & Russo, Alberto, 2014. "Network analysis and calibration of the “leveraged network-based financial accelerator”," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 109-125.

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