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Inhomogeneous Financial Networks and Contagious Links

Author

Listed:
  • Hamed Amini

    (Department of Mathematics, University of Miami, Coral Gables, Florida 33124)

  • Andreea Minca

    (School of Operations Research and Information Engineering, Cornell University, Ithaca, New York 14850)

Abstract

We propose a framework for testing the possibility of large cascades in financial networks. This framework accommodates a variety of specifications for the probabilities of emergence of “contagious links” conditional on a macroeconomic shock, where a contagious link leads to the default of a bank following the default of its counterparty. Under general contagion mechanisms and incomplete information, the financial network is modeled as an inhomogeneous random graph, where the conditional probabilities of having contagious links depend on banks’ characteristics. We give different bounds on the size of the cascade through contagious links and derive testable conditions for this cascade to be small.

Suggested Citation

  • Hamed Amini & Andreea Minca, 2016. "Inhomogeneous Financial Networks and Contagious Links," Operations Research, INFORMS, vol. 64(5), pages 1109-1120, October.
    • Handle: RePEc:inm:oropre:v:64:y:2016:i:5:p:1109-1120
    DOI: 10.1287/opre.2016.1540
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    References listed on IDEAS

    as
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