Cascades in real interbank markets
AbstractWe analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted institution to start a cascade depends on an interplay of shock size and connectivity. Further results indicate that the ability to limit default risk by spreading the lending to many counterparts decreased with the financial crisis. To evaluate the influence of the network structure on market stability, we compare the simulated cascades from the empirical network with results from different randomized network models. The results show that the empirical network has non-random features, which cannot be captured by rewired networks. The analysis also reveals that simulations assuming homogeneity for size of banks and loan contracts dramatically overestimates the fragility of the interbank market.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1310.1634.
Date of creation: Oct 2013
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Web page: http://arxiv.org/
Other versions of this item:
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- G01 - Financial Economics - - General - - - Financial Crises
- E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-10-11 (All new papers)
- NEP-BAN-2013-10-11 (Banking)
- NEP-FMK-2013-10-11 (Financial Markets)
- NEP-NET-2013-10-11 (Network Economics)
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