IDEAS home Printed from https://ideas.repec.org/a/wsi/acsxxx/v19y2016i01n02ns0219525916500016.html
   My bibliography  Save this article

Contagion In Heterogeneous Financial Networks

Author

Listed:
  • YUANYING GUAN

    (Department of Mathematics and Actuarial Science, Indiana University Northwest, 3400 Broadway, Gary, IN 46408, USA)

  • MICAH POLLAK

    (School of Business and Economics, Indiana University Northwest, 3400 Broadway, Gary, IN 46408, USA)

Abstract

In this paper, we use the financial network contagion model of Gai P. and Kapadia S. [Contagion in financial networks, Proc. R. Soc. A 466 (2010) 2401–2423] to investigatethe interaction of several types of heterogeneity found in real world banking systems. The first source of heterogeneity originates in the distribution of assets across banks in the financial system. The second source is in how individual banks then distribute these assets among their neighbors. We characterize how these two sources of heterogeneity interact to affect the probability and extent of financial contagions in three network structures. We find that greater heterogeneity has a stabilizing effect for networks that are sparsely connected and a destabilizing effect for networks that are highly interconnected. Finally, we consider multiple sequential shocks and find that when banks redistribute assets following an initial mild contagion it increases the stability, on average, of the system to subsequent shocks originating at weakened banks.

Suggested Citation

  • Yuanying Guan & Micah Pollak, 2016. "Contagion In Heterogeneous Financial Networks," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 19(01n02), pages 1-25, February.
    • Handle: RePEc:wsi:acsxxx:v:19:y:2016:i:01n02:n:s0219525916500016
    DOI: 10.1142/S0219525916500016
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219525916500016
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219525916500016?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Poledna, Sebastian & Molina-Borboa, José Luis & Martínez-Jaramillo, Serafín & van der Leij, Marco & Thurner, Stefan, 2015. "The multi-layer network nature of systemic risk and its implications for the costs of financial crises," Journal of Financial Stability, Elsevier, vol. 20(C), pages 70-81.
    2. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
    3. 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.
    4. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Systemic Risk and Stability in Financial Networks," American Economic Review, American Economic Association, vol. 105(2), pages 564-608, February.
    5. Klimek, Peter & Poledna, Sebastian & Doyne Farmer, J. & Thurner, Stefan, 2015. "To bail-out or to bail-in? Answers from an agent-based model," Journal of Economic Dynamics and Control, Elsevier, vol. 50(C), pages 144-154.
    6. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
    7. Franklin Allen & Douglas Gale, 2000. "Financial Contagion," Journal of Political Economy, University of Chicago Press, vol. 108(1), pages 1-33, February.
    8. M. E. J. Newman & D. J. Watts, 1999. "Renormalization Group Analysis of the Small-World Network Model," Working Papers 99-04-029, Santa Fe Institute.
    9. Anand, Kartik & Gai, Prasanna & Kapadia, Sujit & Brennan, Simon & Willison, Matthew, 2013. "A network model of financial system resilience," Journal of Economic Behavior & Organization, Elsevier, vol. 85(C), pages 219-235.
    10. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1121-1141.
    11. Bech, Morten L. & Atalay, Enghin, 2010. "The topology of the federal funds market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(22), pages 5223-5246.
    12. Matteo Chinazzi & Giorgio Fagiolo, 2013. "Systemic Risk, Contagion, and Financial Networks: A Survey," LEM Papers Series 2013/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    13. Fabio Caccioli & Thomas A. Catanach & J. Doyne Farmer, 2012. "Heterogeneity, Correlations And Financial Contagion," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 15(supp0), pages 1-15.
    14. Hübsch, Arnd & Walther, Ursula, 2012. "The impact of network inhomogeneities on contagion and system stability," CPQF Working Paper Series 32, Frankfurt School of Finance and Management, Centre for Practical Quantitative Finance (CPQF).
    15. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
    16. Rama Cont & Amal Moussa & Edson B Santos, 2013. "Network structure and systemic risk in banking systems," Post-Print hal-00912018, HAL.
    17. Shmuel Onn & Ishay Weissman, 2011. "Generating uniform random vectors over a simplex with implications to the volume of a certain polytope and to multivariate extremes," Annals of Operations Research, Springer, vol. 189(1), pages 331-342, September.
    18. Iori, Giulia & Jafarey, Saqib & Padilla, Francisco G., 2006. "Systemic risk on the interbank market," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 525-542, December.
    19. Shouwei Li & Jianmin He, 2012. "The Impact Of Bank Activities On Contagion Risk In Interbank Networks," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 15(supp0), pages 1-20.
    20. Gara M. Afonso & Anna Kovner & Antoinette Schoar, 2013. "Trading Partners in the Interbank Lending Market," Staff Reports 620, Federal Reserve Bank of New York.
    21. Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "Network topology of the interbank market," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 677-684.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Micah Pollak & Yuanying Guan, 2017. "Partially Overlapping Ownership and Contagion in Financial Networks," Complexity, Hindawi, vol. 2017, pages 1-16, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andre R. Neveu, 2018. "A survey of network-based analysis and systemic risk measurement," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 241-281, July.
    2. Adão, Luiz F.S. & Silveira, Douglas & Ely, Regis A. & Cajueiro, Daniel O., 2022. "The impacts of interest rates on banks’ loan portfolio risk-taking," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    3. Giulio Bottazzi & Alessandro De Sanctis & Fabio Vanni, 2016. "Non-performing loans, systemic risk and resilience in financial networks," LEM Papers Series 2016/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    4. Berndsen, Ron J. & León, Carlos & Renneboog, Luc, 2018. "Financial stability in networks of financial institutions and market infrastructures," Journal of Financial Stability, Elsevier, vol. 35(C), pages 120-135.
    5. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    6. Marco Bardoscia & Paolo Barucca & Stefano Battiston & Fabio Caccioli & Giulio Cimini & Diego Garlaschelli & Fabio Saracco & Tiziano Squartini & Guido Caldarelli, 2021. "The Physics of Financial Networks," Papers 2103.05623, arXiv.org.
    7. Leventides, John & Loukaki, Kalliopi & Papavassiliou, Vassilios G., 2019. "Simulating financial contagion dynamics in random interbank networks," Journal of Economic Behavior & Organization, Elsevier, vol. 158(C), pages 500-525.
    8. Temizsoy, Asena & Iori, Giulia & Montes-Rojas, Gabriel, 2017. "Network centrality and funding rates in the e-MID interbank market," Journal of Financial Stability, Elsevier, vol. 33(C), pages 346-365.
    9. Liu, Anqi & Paddrik, Mark & Yang, Steve Y. & Zhang, Xingjia, 2020. "Interbank contagion: An agent-based model approach to endogenously formed networks," Journal of Banking & Finance, Elsevier, vol. 112(C).
    10. Fabio Caccioli & Paolo Barucca & Teruyoshi Kobayashi, 2018. "Network models of financial systemic risk: a review," Journal of Computational Social Science, Springer, vol. 1(1), pages 81-114, January.
    11. Paul Glasserman & Peyton Young, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    12. Iori, Giulia & Mantegna, Rosario N. & Marotta, Luca & Miccichè, Salvatore & Porter, James & Tumminello, Michele, 2015. "Networked relationships in the e-MID interbank market: A trading model with memory," Journal of Economic Dynamics and Control, Elsevier, vol. 50(C), pages 98-116.
    13. Yun, Tae-Sub & Jeong, Deokjong & Park, Sunyoung, 2019. "“Too central to fail” systemic risk measure using PageRank algorithm," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 251-272.
    14. Sadamori Kojaku & Giulio Cimini & Guido Caldarelli & Naoki Masuda, 2018. "Structural changes in the interbank market across the financial crisis from multiple core-periphery analysis," Papers 1802.05139, arXiv.org.
    15. Pablo Rovira Kaltwasser & Alessandro Spelta, 2019. "Identifying systemically important financial institutions: a network approach," Computational Management Science, Springer, vol. 16(1), pages 155-185, February.
    16. Montagna, Mattia & Lux, Thomas, 2014. "Contagion risk in the interbank market: A probabilistic approach to cope with incomplete structural information," Kiel Working Papers 1937, Kiel Institute for the World Economy (IfW Kiel).
    17. Teteryatnikova, Mariya, 2014. "Systemic risk in banking networks: Advantages of “tiered” banking systems," Journal of Economic Dynamics and Control, Elsevier, vol. 47(C), pages 186-210.
    18. Hüser, Anne-Caroline, 2016. "Too interconnected to fail: A survey of the Interbank Networks literature," SAFE Working Paper Series 91, Leibniz Institute for Financial Research SAFE, revised 2016.
    19. Arun G. Chandrasekhar & Robert Townsend & Juan Pablo Xandri, 2018. "Financial Centrality and Liquidity Provision," NBER Working Papers 24406, National Bureau of Economic Research, Inc.
    20. Elosegui, Pedro & Forte, Federico D. & Montes-Rojas, Gabriel, 2022. "Network structure and fragmentation of the Argentinean interbank markets," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 3(3).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:acsxxx:v:19:y:2016:i:01n02:n:s0219525916500016. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/acs/acs.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.