A model of financial contagion with variable asset returns may be replaced with a simple threshold model of cascades
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.
References listed on IDEAS
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