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Systemic Risk and Centrality Revisited:The Role of Interactions

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  • Asgharian, Hossein

    (Knut Wicksell Centre for Financial Studies, Lund University)

  • Krygier, Dominika

    (Knut Wicksell Centre for Financial Studies, Lund University)

  • Vilhelmsson, Anders

    (Knut Wicksell Centre for Financial Studies, Lund University)

Abstract

We suggest that banks contribute extensively to systemic risk only if they are both “risky” and centrally placed in the financial network. To calculate systemic risk we apply the ∆CoVaR measure of Adrian and Brunnermeier (2016) and measure centrality using detailed US loan syndication data. In agreement with our conjecture our main finding is that centrality is an important determinant of systemic risk but primarily not by its direct effect. Rather, its main influence is to make other firm specific risk measures more important for highly connected banks. A bank’s contribution to systemic risk from a fixed level of Value-at-Risk is about four times higher for a bank with two standard deviations above average centrality compared to a bank with average network centrality. Neglecting this indirect moderation effect of centrality severely underestimates the importance of centrality for “risky” banks and overestimates the effect for “safer” banks.

Suggested Citation

  • Asgharian, Hossein & Krygier, Dominika & Vilhelmsson, Anders, 2019. "Systemic Risk and Centrality Revisited:The Role of Interactions," Knut Wicksell Working Paper Series 2019/1, Lund University, Knut Wicksell Centre for Financial Studies.
  • Handle: RePEc:hhs:luwick:2019_001
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    References listed on IDEAS

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    More about this item

    Keywords

    systemic risk; network centrality; loan syndication; ∆CoVaR; quantile regression;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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