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Assessing the impact of incomplete information on the resilience of financial networks

Author

Listed:
  • Matteo Cinelli

    (University of Rome Tor Vergata)

  • Giovanna Ferraro

    (University of Rome Tor Vergata)

  • Antonio Iovanella

    (University of Rome Tor Vergata)

  • Giulia Rotundo

    (Sapienza University of Rome)

Abstract

This paper explores the issue of robustness against failure cascades for the network of interbank exposures. The available data were retrieved through the Bank for International Settlements database and report only incomplete information from which networks displaying a core-periphery structure were produced. A model of financial contagion was set up to estimate the width and length of the cascades, and was run on the networks detected from the data, as well as simulated data. The role of incomplete information was taken into account by considering a worst-case scenario in which unobserved links were assumed to be present. Given the core-periphery structure of the network, the worst-case scenario was studied in different sub-cases in which different periphery organisations were considered. Simulations showed that the actual network was far from the worst scenario for the propagation of contagion, meaning that the role of unobserved links can substantially alter the resilience of the whole network.

Suggested Citation

  • Matteo Cinelli & Giovanna Ferraro & Antonio Iovanella & Giulia Rotundo, 2021. "Assessing the impact of incomplete information on the resilience of financial networks," Annals of Operations Research, Springer, vol. 299(1), pages 721-745, April.
    • Handle: RePEc:spr:annopr:v:299:y:2021:i:1:d:10.1007_s10479-019-03306-y
    DOI: 10.1007/s10479-019-03306-y
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    More about this item

    Keywords

    Resilience; Cross-border banking; Network analysis; Financial interconnectedness; Incomplete information;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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