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Overlapping portfolios, contagion, and financial stability

Author

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  • Caccioli, Fabio
  • Farmer, J. Doyne
  • Foti, Nick
  • Rockmore, Daniel

Abstract

We study the problem of interacting channels of contagion in financial networks. The first channel of contagion is counterparty failure risk; this is captured empirically using data for the Austrian interbank network. The second channel of contagion is overlapping portfolio exposures; this is studied using a stylized model. We perform stress tests according to different protocols. For the parameters we study neither channel of contagion results in large effects on its own. In contrast, when both channels are active at once, bankruptcies are much more common and have large systemic effects.

Suggested Citation

  • Caccioli, Fabio & Farmer, J. Doyne & Foti, Nick & Rockmore, Daniel, 2015. "Overlapping portfolios, contagion, and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 50-63.
    • Handle: RePEc:eee:dyncon:v:51:y:2015:i:c:p:50-63
    DOI: 10.1016/j.jedc.2014.09.041
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    References listed on IDEAS

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    More about this item

    Keywords

    Systemic risk; Network models; Contagion;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G01 - Financial Economics - - General - - - Financial Crises

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