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

  • Teruyoshi Kobayashi

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. Keywords: financial network, cascades, financial contagion, systemic risk.

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Paper provided by in its series Papers with number 1312.6804.

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Date of creation: Dec 2013
Date of revision: Apr 2014
Publication status: Published in Economics Letters 124, 113-116, 2014
Handle: RePEc:arx:papers:1312.6804
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  1. 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.
  2. Teruyoshi Kobayashi, 2013. "Network versus portfolio structure in financial systems," Papers 1308.0773,
  3. Teruyoshi Kobayashi & Kohei Hasui, 2013. "Efficient immunization strategies to prevent financial contagion," Papers 1308.0652,, revised Dec 2013.
  4. Jan Lorenz & Stefano Battiston & Frank Schweitzer, . "Systemic Risk in a Unifying Framework for Cascading Processes on Networks," Working Papers CCSS-09-011, ETH Zurich, Chair of Systems Design.
  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. 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.
  7. Kimmo Soramaki & Morten L. Bech & Jeffrey Arnold & Robert J. Glass & Walter E. Beyeler, 2006. "The topology of interbank payment flows," Staff Reports 243, Federal Reserve Bank of New York.
  8. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
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