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Efficient immunization strategies to prevent financial contagion

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  • Teruyoshi Kobayashi
  • Kohei Hasui

Abstract

Many immunization strategies have been proposed to prevent infectious viruses from spreading through a network. In this study, we propose efficient immunization strategies to prevent a default contagion that might occur in a financial network. An essential difference from the previous studies on immunization strategy is that we take into account the possibility of serious side effects. Uniform immunization refers to a situation in which banks are "vaccinated" with a common low-risk asset. The riskiness of immunized banks will decrease significantly, but the level of systemic risk may increase due to the de-diversification effect. To overcome this side effect, we propose another immunization strategy, counteractive immunization, which prevents pairs of banks from failing simultaneously. We find that counteractive immunization can efficiently reduce systemic risk without altering the riskiness of individual banks.

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File URL: http://arxiv.org/pdf/1308.0652
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Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 1308.0652.

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Date of creation: Aug 2013
Date of revision: Dec 2013
Publication status: Published in Scientific Reports 4, 3834, 2014
Handle: RePEc:arx:papers:1308.0652

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Web page: http://arxiv.org/

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  1. Iori, G. & Masi, G. D. & Precup, O. V. & Gabbi, G. & Caldarelli, G., 2005. "A network analysis of the Italian oversight money market," Working Papers 05/05, Department of Economics, City University London.
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  4. Teruyoshi Kobayashi, 2013. "Network versus portfolio structure in financial systems," Papers 1308.0773, arXiv.org.
  5. 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.
  6. Fabio Caccioli & Munik Shrestha & Cristopher Moore & J. Doyne Farmer, 2012. "Stability analysis of financial contagion due to overlapping portfolios," Papers 1210.5987, arXiv.org.
  7. Simone LENZU & Gabriele TEDESCHI, 2012. "Systemic risk on different interbank network topologies," Working Papers 375, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  8. Jan Lorenz & Stefano Battiston & Frank Schweitzer, . "Systemic Risk in a Unifying Framework for Cascading Processes on Networks," Working Papers CCSS-09-011, ETH Zurich, Chair of Systems Design.
  9. Kimmo Soramaki & Morten L. Bech & Jeffrey Arnold & Robert J. Glass & Walter Beyeler, 2006. "The topology of interbank payment flows," Staff Reports 243, Federal Reserve Bank of New York.
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Cited by:
  1. Teruyoshi Kobayashi, 2013. "A model of financial contagion with variable asset returns may be replaced with a simple threshold model of cascades," Discussion Papers 1315, Graduate School of Economics, Kobe University.

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