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Measuring the Systemic Risk in Interfirm Transaction Networks

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  • Hazama, Makoto
  • Uesugi, Iichiro

Abstract

Using a unique and massive data set that contains information on interfirm transaction relationships, we examine default propagation along the trade credit channel and for the first time provide direct and systematic evidence of its existence and relevance. Not only do we implement simulations in order to detect prospective defaulters, we also estimate the probabilities of actual firm bankruptcies and compare the predicted defaults and actual defaults. We find, first, that an economically sizable number of firms are predicted to fail when their customers default on their trade debt. Second, these prospective defaulters are indeed more likely to go bankrupt than other firms. Third, a certain type of firm-bank relationships, in which a bank extends loans to many of the firms in the same supply chain, significantly reduces firms' bankruptcy probability, providing evidence for the existence and relevance of ”deep pockets” as documented in Kiyotaki and Moore (1997).

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/25354/1/ifn_wp020.pdf
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Bibliographic Info

Paper provided by Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University in its series Working Paper Series with number 20.

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Length: 33 p.
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:hit:cinwps:20

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Related research

Keywords: interfirm networks; trade credit; default propagation;

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  1. Peter Thompson & Melanie Fox-Kean, 2005. "Patent Citations and the Geography of Knowledge Spillovers: A Reassessment," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 450-460, March.
  2. NAKAJIMA Kentaro & SAITO Yukiko Umeno & UESUGI Iichiro, 2012. "Localization of Interfirm Transaction Relationships and Industry Agglomeration," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 12023, Research Institute of Economy, Trade and Industry (RIETI).
  3. Raddatz, Claudio, 2008. "Credit chains and sectoral comovemen t: does the use of trade credit amplify sectoral shocks ?," Policy Research Working Paper Series 4525, The World Bank.
  4. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, Elsevier, vol. 7(3), pages 111-125, August.
  5. Peter Thompson & Melanie Fox-Kean, 2005. "Patent Citations and the Geography of Knowledge Spillovers: A Reassessment: Reply," American Economic Review, American Economic Association, American Economic Association, vol. 95(1), pages 465-466, March.
  6. Horvath, Michael, 2000. "Sectoral shocks and aggregate fluctuations," Journal of Monetary Economics, Elsevier, Elsevier, vol. 45(1), pages 69-106, February.
  7. Boissay, Frédéric, 2006. "Credit chains and the propagation of financial distress," Working Paper Series, European Central Bank 0573, European Central Bank.
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