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Financial Contagion in Interbank Networks: The Case of Erdős–Rényi Network Model

In: Nonlinear Analysis, Differential Equations, and Applications

Author

Listed:
  • K. Loukaki

    (National and Kapodistrian University of Athens)

  • P. Boufounou

    (National and Kapodistrian University of Athens)

  • J. Leventides

    (National and Kapodistrian University of Athens)

Abstract

In this study, we extend the model developed in Leventides et al. (J Econ Behav Organ 158:500–525, 2019) to include a wide variety of network topologies and provide a better understanding of the relation between network structure, banks’ characteristics and interbank contagion. While the focus of this paper is on the various factors that affect interbank contagion such as bank capital ratios, leverage, interconnectedness and homogeneity across banks’ sizes, the model lacks flexibility as far as the variability of the networks links is concerned. In order to circumvent this problem, we introduce the Erdős–Rényi probabilistic network model in our study to provide a wider vicinity of scenarios concerning the network structure of the interbank system and study how homogeneity within the interbank network affects the propagation of financial distress from one institution to the other parts of the system through bilateral exposures.

Suggested Citation

  • K. Loukaki & P. Boufounou & J. Leventides, 2021. "Financial Contagion in Interbank Networks: The Case of Erdős–Rényi Network Model," Springer Optimization and Its Applications, in: Themistocles M. Rassias (ed.), Nonlinear Analysis, Differential Equations, and Applications, pages 277-317, Springer.
    • Handle: RePEc:spr:spochp:978-3-030-72563-1_13
    DOI: 10.1007/978-3-030-72563-1_13
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