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A model of financial contagion with variable asset returns may be replaced with a simple threshold model of cascades

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  • Kobayashi, Teruyoshi

Abstract

I show the equivalence between a model of financial contagion and the threshold model of global cascades proposed by Watts (2002). The model financial network comprises banks that hold risky external assets as well as interbank assets. It is shown that a simple threshold model can replicate the size and the frequency of financial contagion without using information about individual balance sheets.

Suggested Citation

  • Kobayashi, Teruyoshi, 2014. "A model of financial contagion with variable asset returns may be replaced with a simple threshold model of cascades," Economics Letters, Elsevier, vol. 124(1), pages 113-116.
    • Handle: RePEc:eee:ecolet:v:124:y:2014:i:1:p:113-116
    DOI: 10.1016/j.econlet.2014.05.003
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    1. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
    2. Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
    3. J. Lorenz & S. Battiston & F. Schweitzer, 2009. "Systemic risk in a unifying framework for cascading processes on networks," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 71(4), pages 441-460, October.
    4. Teruyoshi Kobayashi & Kohei Hasui, 2013. "Efficient immunization strategies to prevent financial contagion," Papers 1308.0652, arXiv.org, revised Dec 2013.
    5. 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.
    6. Teruyoshi Kobayashi, 2013. "Network versus portfolio structure in financial systems," Discussion Papers 1307, Graduate School of Economics, Kobe University.
    7. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
    8. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2007. "Network models and financial stability," Journal of Economic Dynamics and Control, Elsevier, vol. 31(6), pages 2033-2060, June.
    9. Lenzu, Simone & Tedeschi, Gabriele, 2012. "Systemic risk on different interbank network topologies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(18), pages 4331-4341.
    10. Duncan J. Watts & Peter Sheridan Dodds, 2007. "Influentials, Networks, and Public Opinion Formation," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 34(4), pages 441-458, May.
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    Cited by:

    1. Fabio Caccioli & Paolo Barucca & Teruyoshi Kobayashi, 2018. "Network models of financial systemic risk: a review," Journal of Computational Social Science, Springer, vol. 1(1), pages 81-114, January.
    2. Irena Barjav{s}i'c & Stefano Battiston & Vinko Zlati'c, 2023. "Credit Valuation Adjustment in Financial Networks," Papers 2305.16434, arXiv.org.
    3. Wang, Ze & Gao, Xiangyun & Huang, Shupei & Sun, Qingru & Chen, Zhihua & Tang, Renwu & Di, Zengru, 2022. "Measuring systemic risk contribution of global stock markets: A dynamic tail risk network approach," International Review of Financial Analysis, Elsevier, vol. 84(C).
    4. Teruyoshi Kobayashi, 2015. "Trend-driven information cascades on random networks," Discussion Papers 1529, Graduate School of Economics, Kobe University.
    5. Zhao, Longfeng & Yang, Yajie & Bai, Xiao & Chen, Lin & Lu, An-Liang & Zhang, Xin & Chen, Wei-Qiang, 2023. "Structure, robustness and supply risk in the global wind turbine trade network," Renewable and Sustainable Energy Reviews, Elsevier, vol. 177(C).

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    More about this item

    Keywords

    Financial network; Cascades; Financial contagion; Systemic risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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