Contagion in financial networks
This paper develops an analytical model of contagion in financial networks with arbitrary structure. We explore how the probability and potential impact of contagion is influenced by aggregate and idiosyncratic shocks, changes in network structure, and asset market liquidity. Our findings suggest that financial systems exhibit a robust-yet-fragile tendency: while the probability of contagion may be low, the effects can be extremely widespread when problems occur. And we suggest why the resilience of the system in withstanding fairly large shocks prior to 2007 should not have been taken as a reliable guide to its future robustness.
|Date of creation:||23 Mar 2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrea Galeotti & Sanjeev Goyal, 2009. "Influencing the influencers: a theory of strategic diffusion," RAND Journal of Economics, RAND Corporation, vol. 40(3), pages 509-532.
- Castiglionesi, F. & Navarro, N., 2007. "Optimal Fragile Financial Networks," Discussion Paper 2007-100, Tilburg University, Center for Economic Research.
- Sandro Brusco & Fabio Castiglionesi, 2007.
"Liquidity Coinsurance, Moral Hazard, and Financial Contagion,"
Journal of Finance,
American Finance Association, vol. 62(5), pages 2275-2302, October.
- Sandro Brusco & Fabio Castiglionesi, 2005. "Liquidity Coinsurance, Moral Hazard and Financial Contagion," Department of Economics Working Papers 05-12, Stony Brook University, Department of Economics.
- Guillermo A. Calvo & Enrique G. Mendoza, 1999.
"Regional Contagion and the Globalization of Securities Markets,"
NBER Working Papers
7153, National Bureau of Economic Research, Inc.
- Calvo, Guillermo A. & Mendoza, Enrique G., 2000. "Rational contagion and the globalization of securities markets," Journal of International Economics, Elsevier, vol. 51(1), pages 79-113, June.
- Egloff, Daniel & Leippold, Markus & Vanini, Paolo, 2007. "A simple model of credit contagion," Journal of Banking & Finance, Elsevier, vol. 31(8), pages 2475-2492, August.
- Jackson, Matthew O. & Yariv, Leeat, 2006.
"Diffusion of Behavior and Equilibrium Properties in Network Games,"
1264, California Institute of Technology, Division of the Humanities and Social Sciences.
- Matthew O. Jackson & Leeat Yariv, 2007. "Diffusion of Behavior and Equilibrium Properties in Network Games," American Economic Review, American Economic Association, vol. 97(2), pages 92-98, May.
- 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.
- Christian Upper & Andreas Worms, 2001. "Estimating bilateral exposures in the German interbank market: is there a danger of contagion?," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229 Bank for International Settlements.
- Upper, Christian & Worms, Andreas, 2002. "Estimating Bilateral Exposures in the German Interbank Market: Is there a Danger of Contagion?," Discussion Paper Series 1: Economic Studies 2002,09, Deutsche Bundesbank, Research Centre.
- Iman van Lelyveld & Franka Liedorp, 2006.
"Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis,"
International Journal of Central Banking,
International Journal of Central Banking, vol. 2(2), May.
- Lelyveld, Iman van & Liedorp, Franka, 2006. "Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis," MPRA Paper 806, University Library of Munich, Germany.
- Helmut Elsinger & Alfred Lehar & Martin Summer, 2002.
"Risk Assessment for Banking Systems,"
79, Oesterreichische Nationalbank (Austrian Central Bank).
- Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "Network topology of the interbank market," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 677-684.
- Kimmo Soramaki & Morten L. Bech & Jeffrey Arnold & Robert J. Glass & Walter E. Beyeler, 2006.
"The topology of interbank payment flows,"
243, Federal Reserve Bank of New York.
- Soramäki, Kimmo & Bech, Morten L. & Arnold, Jeffrey & Glass, Robert J. & Beyeler, Walter E., 2007. "The topology of interbank payment flows," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 379(1), pages 317-333.
- Xavier Freixas & Bruno Parigi & Jean-Charles Rochet, 2000.
"Systemic risk, interbank relations, and liquidity provision by the central bank,"
Federal Reserve Bank of Cleveland, pages 611-640.
- Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-38, August.
- Freixas, Xavier & Parigi, Bruno & Rochet, Jean-Charles, 1999. "Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank," CEPR Discussion Papers 2325, C.E.P.R. Discussion Papers.
- X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued) 47, Netherlands Central Bank.
- Xavier Freixas & Bruno Parigi & Jean Charles Rochet, 1998. "Systemic risk, interbank relations and liquidity provision by the Central Bank," Economics Working Papers 440, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
- Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005.
"Liquidity Risk and Contagion,"
Journal of the European Economic Association,
MIT Press, vol. 3(2-3), pages 556-566, 04/05.
- Christian Upper, 2007. "Using counterfactual simulations to assess the danger of contagion in interbank markets," BIS Working Papers 234, Bank for International Settlements.
- Isabel Schnabel & Hyun Song Shin, 2004. "Liquidity and Contagion: The Crisis of 1763," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 929-968, December.
- Douglas M. Gale & Shachar Kariv, 2007. "Financial Networks," American Economic Review, American Economic Association, vol. 97(2), pages 99-103, May.
- Iori, Giulia & Jafarey, Saqib & Padilla, Francisco G., 2006. "Systemic risk on the interbank market," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 525-542, December.
- 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.
- Hyun Song Shin, 2006.
"Risk and liquidity in a system context,"
BIS Working Papers
212, Bank for International Settlements.
- Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-28, February.
- Giesecke, Kay & Weber, Stefan, 2004. "Cyclical correlations, credit contagion, and portfolio losses," Journal of Banking & Finance, Elsevier, vol. 28(12), pages 3009-3036, December.
- 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.
- Paolo Emilio Mistrulli, 2007. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Temi di discussione (Economic working papers) 641, Bank of Italy, Economic Research and International Relations Area.
- Jackson Matthew O. & Rogers Brian W., 2007. "Relating Network Structure to Diffusion Properties through Stochastic Dominance," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-16, February.
- Giesecke, Kay, 2004. "Correlated default with incomplete information," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1521-1545, July.
When requesting a correction, please mention this item's handle: RePEc:boe:boeewp:0383. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publications Team)
If references are entirely missing, you can add them using this form.