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On Global Stability of Financial Networks


  • Bhaskar DasGupta
  • Lakshmi Kaligounder


The recent financial crisis have generated renewed interests in fragilities of global financial networks among economists and regulatory authorities. In particular, a potential vulnerability of the financial networks is the "financial contagion" process in which insolvencies of individual entities propagate through the "web of dependencies" to affect the entire system. In this paper, we formalize an extension of a financial network model originally proposed by Nier et al. for scenarios such as the OTC derivatives market, define a suitable global stability measure for this model, and perform a comprehensive empirical evaluation of this stability measure over more than 700,000 combinations of networks types and parameter combinations. Based on our evaluations, we discover many interesting implications of our evaluations of this stability measure, and derive topological properties and parameters combinations that may be used to flag the network as a possible fragile network. An interactive software FIN-STAB for computing the stability is available from the website

Suggested Citation

  • Bhaskar DasGupta & Lakshmi Kaligounder, 2012. "On Global Stability of Financial Networks," Papers 1208.3789,, revised Aug 2014.
  • Handle: RePEc:arx:papers:1208.3789

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    References listed on IDEAS

    1. Lagunoff, Roger & Schreft, Stacey L., 2001. "A Model of Financial Fragility," Journal of Economic Theory, Elsevier, vol. 99(1-2), pages 220-264, July.
    2. Xavier Freixas & Bruno Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, pages 611-640.
    3. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
    4. Rajkamal Iyer & José-Luis Peydró, 2011. "Interbank Contagion at Work: Evidence from a Natural Experiment," Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1337-1377.
    5. 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.
    6. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
    7. Mistrulli, Paolo Emilio, 2011. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1114-1127, May.
    8. Sheri Markose & Simone Giansante & Mateusz Gatkowski & Ali Rais Shaghaghi, 2010. "Too Interconnected To Fail: Financial Contagion and Systemic Risk In Network Model of CDS and Other Credit Enhancement Obligations of US Banks," Working Papers 033, COMISEF.
    9. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
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    Cited by:

    1. Alexei P Kireyev & Andrei Leonidov, 2015. "Network Effects of International Shocks and Spillovers," IMF Working Papers 15/149, International Monetary Fund.
    2. Daniel Felix Ahelegbey, 2015. "The Econometrics of Networks: A Review," Working Papers 2015:13, Department of Economics, University of Venice "Ca' Foscari".
    3. Daniel Felix Ahelegbey & Monica Billio & Roberto Casarin, 2016. "Sparse Graphical Vector Autoregression: A Bayesian Approach," Annals of Economics and Statistics, GENES, issue 123-124, pages 333-361.
    4. Christos Ellinas & Neil Allan & Caroline Coombe, 2018. "Evaluating the role of risk networks on risk identification, classification and emergence," Papers 1801.05759,

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