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Cascades in Real Interbank Markets

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  • Fariba Karimi

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  • Matthias Raddant

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Abstract

We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted institution to start a cascade depends on an interplay of shock size and connectivity. Further results indicate that the interbank loan network is structurally less stable after the financial crisis than it was before. To evaluate the influence of the network structure on market stability, we compare simulated cascades from the empirical network with results from different network models. The results show that the empirical network has non-random features, which cannot be captured by randomized networks. The analysis also reveals that simulations that assume homogeneity for banks and loan size tend to overestimate the fragility of the interbank market. Copyright Springer Science+Business Media New York 2016

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  • Fariba Karimi & Matthias Raddant, 2016. "Cascades in Real Interbank Markets," Computational Economics, Springer;Society for Computational Economics, vol. 47(1), pages 49-66, January.
    • Handle: RePEc:kap:compec:v:47:y:2016:i:1:p:49-66
    DOI: 10.1007/s10614-014-9478-z
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    References listed on IDEAS

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    Cited by:

    1. Tohmé, Fernando & Larrosa, Juan M.C., 2016. "Architectures engender crises: The emergence of power laws in social networks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 450(C), pages 305-316.
    2. V. Sasidevan & Nils Bertschinger, 2019. "Systemic Risk: Fire-Walling Financial Systems Using Network-Based Approaches," Papers 1912.05273, arXiv.org.
    3. Ohsung Kwon & Sung-guan Yun & Seung Hun Han & Yang Hon Chung & Duk Hee Lee, 2018. "Network Topology and Systemically Important Firms in the Interfirm Credit Network," Computational Economics, Springer;Society for Computational Economics, vol. 51(4), pages 847-864, April.
    4. Hossein Dastkhan & Naser Shams Gharneh, 2019. "Simulation of Contagion in the Stock Markets Using Cross-Shareholding Networks: A Case from an Emerging Market," Computational Economics, Springer;Society for Computational Economics, vol. 53(3), pages 1071-1101, March.
    5. Mitja Steinbacher & Timotej Jagrič, 2020. "Interbank rules during economic declines: Can banks safeguard capital base?," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(2), pages 471-499, April.
    6. Lux, Thomas, 2016. "Network effects and systemic risk in the banking sector," FinMaP-Working Papers 62, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    7. Massimo Guidolin & Manuela Pedio, 2020. "Media Attention vs. Sentiment as Drivers of Conditional Volatility Predictions: An Application to Brexit," BAFFI CAREFIN Working Papers 20145, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    8. Matteo Cinelli & Giovanna Ferraro & Antonio Iovanella & Giulia Rotundo, 0. "Assessing the impact of incomplete information on the resilience of financial networks," Annals of Operations Research, Springer, vol. 0, pages 1-25.
    9. Ding Ding & Liyan Han & Libo Yin, 2017. "Systemic risk and dynamics of contagion: a duplex inter-bank network," Quantitative Finance, Taylor & Francis Journals, vol. 17(9), pages 1435-1445, September.

    More about this item

    Keywords

    Interbank loan network; Systemic risk; Cascades ; Null models;

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G01 - Financial Economics - - General - - - Financial Crises
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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