Simulating Financial Contagion Dynamics in Random Interbank Networks
50 Pages Posted: 5 Sep 2018 Last revised: 21 Feb 2019
Date Written: December 24, 2018
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.
Keywords: interbank contagion, random networks, financial stability, interconnectedness, systemic risk
JEL Classification: C63, D85, G21
Suggested Citation: Suggested Citation