Finding communities in credit networks
AbstractIn this paper the authors focus on credit connections as a potential source of systemic risk. In particular, they seek to answer the following question: how do we find densely connected subsets of nodes within a credit network? The question is relevant for policy, since these subsets are likely to channel any shock affecting the network. As it turns out, a reliable answer can be obtained with the aid of complex network theory. In particular, the authors show how it is possible to take advantage of the community detection network literature. The proposed answer entails two subsequent steps. Firstly, the authors need to verify the hypothesis that the network under study truly has communities. Secondly, they need to devise a reliable algorithm to find those communities. In order to be sure that a given algorithm works, they need to test it over a sample of random benchmark networks with known communities. To overcome the limitation of existing benchmarks, the authors introduce a new model and test alternative algorithms, obtaining very good results with an adapted spectral decomposition method. To illustrate this method they provide a community description of the Japanese bank-firm credit network, getting evidence of a strengthening of communities over time and finding support for the well-known Japanese main bank system. Thus, the authors find comfort both from simulations and from real data on the possibility to apply community detection methods to credit markets. They believe that this method can fruitfully complement the study of contagious defaults, since the likelihood of intracommunity default contagion is expected to be high. --
Download InfoIf 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.
Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2012-41.
Date of creation: 2012
Date of revision:
Credit networks; communities; contagion; systemic risk;
Other versions of this item:
- Bargigli, Leonardo & Gallegati, Mauro, 2013. "Finding communities in credit networks," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 7(17), pages 1-39.
- C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
- E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-09 (All new papers)
- NEP-BAN-2012-09-09 (Banking)
- NEP-CBA-2012-09-09 (Central Banking)
- NEP-CMP-2012-09-09 (Computational Economics)
- NEP-NET-2012-09-09 (Network Economics)
- NEP-RMG-2012-09-09 (Risk Management)
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.:
- Aoki,Masanao & Yoshikawa,Hiroshi, 2007. "Reconstructing Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521831062, November.
- Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Systemically important banks: an analysis for the European banking system," International Economics and Economic Policy, Springer, vol. 3(1), pages 73-89, April.
- Lelyveld, Iman van & Liedorp, Franka, 2006.
"Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis,"
806, University Library of Munich, Germany.
- 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, vol. 2(2), May.
- E. N. Sawardecker & C. A. Amundsen & M. Sales-Pardo & L. A.N. Amaral, 2009. "Comparison of methods for the detection of node group membership in bipartite networks," The European Physical Journal B - Condensed Matter and Complex Systems, Springer, vol. 72(4), pages 671-677, December.
- G. De Masi & Y. Fujiwara & M. Gallegati & B. Greenwald & J. E. Stiglitz, 2009. "An Analysis of the Japanese Credit Network," Papers 0901.2384, arXiv.org, revised Nov 2010.
- Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
- 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.
- Stefano Battiston & Domenico Delli Gatti & Mauro Gallegati & Bruce C. Greenwald & Joseph E. Stiglitz, 2009. "Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk," NBER Working Papers 15611, National Bureau of Economic Research, Inc.
- Paolo Emilio Mistrulli, 2007.
"Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns,"
Temi di discussione (Economic working papers)
641, Bank of Italy, Economic Research and International Relations Area.
- Mistrulli, Paolo Emilio, 2011. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1114-1127, May.
- Upper, Christian & Worms, Andreas, 2002.
"Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?,"
Discussion Paper Series 1: Economic Studies
2002,09, Deutsche Bundesbank, Research Centre.
- 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.
- Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2008.
"Network models and financial stability,"
Bank of England working papers
346, Bank of England.
- Bargigli, Leonardo & Gallegati, Mauro, 2011. "Random digraphs with given expected degree sequences: A model for economic networks," Journal of Economic Behavior & Organization, Elsevier, vol. 78(3), pages 396-411, May.
- Kavonius, Ilja Kristian & Castrén, Olli, 2009. "Balance Sheet Interlinkages and Macro-Financial Risk Analysis in the Euro Area," Working Paper Series 1124, European Central Bank.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics).
If references are entirely missing, you can add them using this form.