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Simulating financial contagion dynamics in random interbank networks

Author

Listed:
  • John Leventides

    () (Department of Economics, University of Athens, Greece)

  • Kalliopi Loukaki

    () (Department of Economics, University of Athens, Greece)

  • Vassilios Papavassiliou

    () (UCD Michael Smurfit Graduate Business School, University College Dublin, Ireland; Rimini Centre for Economic Analysis)

Abstract

The purpose of this study is to assess the resilience of financial systems to exogenous shocks using techniques drawn from the theory of complex networks. We investigate by means of Monte Carlo simulations the fragility of several network topologies using a simple default model of contagion applied on interbank networks of varying sizes. We trigger a series of banking crises by exogenously failing each bank in the system and observe the propagation mechanisms that take effect within the system under different scenarios. Finally, we add to the existing literature by analyzing the interplay of several crucial drivers of interbank contagion, such as network topology, leverage, interconnectedness, heterogeneity and homogeneity across bank sizes and interbank exposures.

Suggested Citation

  • John Leventides & Kalliopi Loukaki & Vassilios Papavassiliou, 2018. "Simulating financial contagion dynamics in random interbank networks," Working Paper series 18-34, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:18-34
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    Cited by:

    1. Pierre L. Siklos & Martin Stefan, 2020. "Exchange rate shocks in multicurrency interbank markets," CQE Working Papers 9220, Center for Quantitative Economics (CQE), University of Muenster.

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    Keywords

    Interbank contagion; random networks; financial stability; interconnectedness; systemic risk;
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