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Credit Contagion in Financial Markets: A Network-Based Approach

Author

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  • Steinbacher, Matjaz
  • Steinbacher, Mitja
  • Steinbacher, Matej

Abstract

We propose a network-based model of credit contagion and examine the e�ects of idiosyncratic and systemic shocks to individual banks and the banking system. The banking system is built as a network in which banks are connected to each other through the interbank market. The microstructure captures the relation between debtors and creditors, and the macroeconomic events capture the sensitivity of the banks' �nancial strenght to macroeconomic events, such as housing. We have demonstrated that while idiosyncratic shocks do not have a potential to substantially disturb the banking system, macroeconomic events of higher magnitudes could be highly harmful, especially if they also spur contagion. In a concerted default of more banks, the stability of a banking system tends to decrease disproportionately. In addition, credit risk analysis is highly sensitive to the network topology and exhibits a nonlinear characteristic. Capital ratio and recovery rates are two additional factors that contribute to the stability of the �nancial system.

Suggested Citation

  • Steinbacher, Matjaz & Steinbacher, Mitja & Steinbacher, Matej, 2013. "Credit Contagion in Financial Markets: A Network-Based Approach," MPRA Paper 49616, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:49616
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    File URL: https://mpra.ub.uni-muenchen.de/49616/1/MPRA_paper_49616.pdf
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    References listed on IDEAS

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    Cited by:

    1. João Silvestre, 2017. "Sovereign default contagion: an agent-based model approach," Working Papers Department of Economics 2017/08, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    2. J. Molins & E. Vives, 2015. "Model risk on credit risk," Papers 1502.06984, arXiv.org, revised Dec 2015.

    More about this item

    Keywords

    credit contagion; network models; credit risk; structural models; fi�nancial stability; alpha-criticality index;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G01 - Financial Economics - - General - - - Financial Crises

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