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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

    ()

    (Graduate School of Economics, Kobe University)

I show the equivalence between a model of financial contagion and the widely-used 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 turns out that there is no need to construct the balance sheets of banks if the shadow threshold of default is appropriately defined in accordance with the stochastic fluctuations in external assets.

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File URL: http://www.econ.kobe-u.ac.jp/RePEc/koe/wpaper/2013/1315.pdf
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Paper provided by Graduate School of Economics, Kobe University in its series Discussion Papers with number 1315.

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Length: 8pages
Date of creation: Dec 2013
Date of revision:
Handle: RePEc:koe:wpaper:1315
Contact details of provider: Web page: http://www.econ.kobe-u.ac.jp
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  1. Teruyoshi Kobayashi, 2013. "Network versus portfolio structure in financial systems," Papers 1308.0773, arXiv.org.
  2. 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.
  3. 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.
  4. Teruyoshi Kobayashi & Kohei Hasui, 2013. "Efficient immunization strategies to prevent financial contagion," Papers 1308.0652, arXiv.org, revised Dec 2013.
  5. Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
  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. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2008. "Network models and financial stability," Bank of England working papers 346, Bank of England.
  8. 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.
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