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Contagion in financial networks

Author

Listed:
  • Gai, Prasanna

    () (Australian National University)

  • Kapadia, Sujit

    () (Bank of England)

Abstract

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.

Suggested Citation

  • Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
    • Handle: RePEc:boe:boeewp:0383
    as

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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2010/contagion-in-financial-networks.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Contagion; network models; systemic risk; liquidity risk; financial crises;

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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