Advanced Search
MyIDEAS: Login to save this paper or follow this series

Credit Contagion in Financial Markets: A Network-Based Approach

Contents:

Author Info

  • Steinbacher, Matjaz
  • Steinbacher, Mitja
  • Steinbacher, Matej

Abstract

We propose a network-based model of credit contagion and examine the e�ects of idiosyncratic and systemic shocks to individual banks and the banking system. The banking system is built as a network in which banks are connected to each other through the interbank market. The microstructure captures the relation between debtors and creditors, and the macroeconomic events capture the sensitivity of the banks' �nancial strenght to macroeconomic events, such as housing. We have demonstrated that while idiosyncratic shocks do not have a potential to substantially disturb the banking system, macroeconomic events of higher magnitudes could be highly harmful, especially if they also spur contagion. In a concerted default of more banks, the stability of a banking system tends to decrease disproportionately. In addition, credit risk analysis is highly sensitive to the network topology and exhibits a nonlinear characteristic. Capital ratio and recovery rates are two additional factors that contribute to the stability of the �nancial system.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://mpra.ub.uni-muenchen.de/49616/
File Function: original version
Download Restriction: no

Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 49616.

as in new window
Length:
Date of creation: 2013
Date of revision:
Handle: RePEc:pra:mprapa:49616

Contact details of provider:
Postal: Schackstr. 4, D-80539 Munich, Germany
Phone: +49-(0)89-2180-2219
Fax: +49-(0)89-2180-3900
Web page: http://mpra.ub.uni-muenchen.de
More information through EDIRC

Related research

Keywords: credit contagion; network models; credit risk; structural models; fi�nancial stability; alpha-criticality index;

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, Elsevier, vol. 48(4), pages 827-849, August.
  2. David Colander & Hans Föllmer & Armin Haas & Michael Goldberg & Katarina Juselius & Alan Kirman & Thomas Lux & Brigitte Sloth, 2009. "The Financial Crisis and the Systemic Failure of Academic Economics," Kiel Working Papers 1489, Kiel Institute for the World Economy.
  3. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2008. "Network models and financial stability," Bank of England working papers, Bank of England 346, Bank of England.
  4. Acharya, Viral V. & Bharath, Sreedhar T. & Srinivasan, Anand, 2007. "Does industry-wide distress affect defaulted firms? Evidence from creditor recoveries," Journal of Financial Economics, Elsevier, Elsevier, vol. 85(3), pages 787-821, September.
  5. X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued), Netherlands Central Bank 47, Netherlands Central Bank.
  6. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 28(4), pages 733-62, November.
  7. Amil Dasgupta, 2004. "Financial Contagion Through Capital Connections: A Model of the Origin and Spread of Bank Panics," Journal of the European Economic Association, MIT Press, MIT Press, vol. 2(6), pages 1049-1084, December.
  8. Iman van Lelyveld & Franka Liedorp, 2006. "Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 2(2), May.
  9. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, American Finance Association, vol. 56(6), pages 2177-2207, December.
  10. Iori, G. & Masi, G. D. & Precup, O. V. & Gabbi, G. & Caldarelli, G., 2005. "A network analysis of the Italian oversight money market," Working Papers, Department of Economics, City University London 05/05, Department of Economics, City University London.
  11. Viral V. Acharya & Ouarda Merrouche, 2013. "Precautionary Hoarding of Liquidity and Interbank Markets: Evidence from the Subprime Crisis," Review of Finance, European Finance Association, European Finance Association, vol. 17(1), pages 107-160.
  12. Giesecke, Kay & Weber, Stefan, 2004. "Cyclical correlations, credit contagion, and portfolio losses," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(12), pages 3009-3036, December.
  13. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, American Finance Association, vol. 51(3), pages 987-1019, July.
  14. Coralio Ballester & Antoni Calvó-Armengol & Yves Zenou, 2006. "Who's Who in Networks. Wanted: The Key Player," Econometrica, Econometric Society, Econometric Society, vol. 74(5), pages 1403-1417, 09.
  15. Simon Gilchrist & Vladimir Yankov & Egon Zakrajsek, 2009. "Credit Market Shocks and Economic Fluctuations: Evidence from Corporate Bond and Stock Markets," NBER Working Papers 14863, National Bureau of Economic Research, Inc.
  16. Stefan Weber & Kay Giesecke, 2003. "Credit Contagion and Aggregate Losses," Computing in Economics and Finance 2003, Society for Computational Economics 246, Society for Computational Economics.
  17. Darrell DUFFIE & Andreas ECKNER & Guillaume HOREL & Leandro SAITA, . "Frailty Correlated Default," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 08-44, Swiss Finance Institute.
  18. Tirole, Jean, 2009. "Illiquidity and All Its Friends," TSE Working Papers, Toulouse School of Economics (TSE) 09-083, Toulouse School of Economics (TSE), revised Feb 2010.
  19. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 23(1), pages 77-100, Winter.
  20. Daron Acemoglu & Vasco Carvalho & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2011. "The Network Origins of Aggregate Fluctuations," Working Papers 587, Barcelona Graduate School of Economics.
  21. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, American Finance Association, vol. 7(1), pages 77-91, 03.
  22. 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, Elsevier, vol. 36(8), pages 1121-1141.
  23. Viral Acharya & Tanju Yorulmazer, 2007. "Too many to fail - an analysis of time-inconsistency in bank closure policies," Bank of England working papers, Bank of England 319, Bank of England.
  24. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers, Bank of England 383, Bank of England.
  25. Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 35(1), pages 111-28, February.
  26. Hans Degryse & Grégory Nguyen, 2007. "Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 123-171, June.
  27. Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "Network topology of the interbank market," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 4(6), pages 677-684.
  28. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 177-188, November.
  29. Edward I. Altman & Brooks Brady & Andrea Resti & Andrea Sironi, 2005. "The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 78(6), pages 2203-2228, November.
  30. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, American Finance Association, vol. 29(2), pages 449-70, May.
  31. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, American Finance Association, vol. 50(1), pages 53-85, March.
  32. Egloff, Daniel & Leippold, Markus & Vanini, Paolo, 2007. "A simple model of credit contagion," Journal of Banking & Finance, Elsevier, Elsevier, vol. 31(8), pages 2475-2492, August.
  33. 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.
  34. Rodrigo Cifuentes & Gianluigi Ferrucci & Hyun Song Shin, 2005. "Liquidity risk and contagion," Bank of England working papers, Bank of England 264, Bank of England.
  35. Yaron Leitner, 2005. "Financial Networks: Contagion, Commitment, and Private Sector Bailouts," Journal of Finance, American Finance Association, American Finance Association, vol. 60(6), pages 2925-2953, December.
  36. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 47(4), pages 1343-66, September.
  37. Andrei Shleifer & Robert W. Vishny, 2010. "Fire Sales in Finance and Macroeconomics," NBER Working Papers 16642, National Bureau of Economic Research, Inc.
  38. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 12(04), pages 627-627, November.
  39. Jorion, Philippe & Zhang, Gaiyan, 2007. "Good and bad credit contagion: Evidence from credit default swaps," Journal of Financial Economics, Elsevier, Elsevier, vol. 84(3), pages 860-883, June.
  40. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 56(4), pages 1533-1597, 08.
  41. Hayne E. Leland., 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Research Program in Finance Working Papers, University of California at Berkeley RPF-233, University of California at Berkeley.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:49616. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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