Simulating Financial Contagion Dynamics in Random Interbank Networks

50 Pages Posted: 5 Sep 2018 Last revised: 21 Feb 2019

See all articles by John Leventides

John Leventides

National and Kapodistrian University of Athens - Department of Economics

Kalliopi Loukaki

National and Kapodistrian University of Athens - Department of Economics

Vassilios G. Papavassiliou

University College Dublin (UCD) - Michael Smurfit Graduate School of Business; UCD Geary Institute for Public Policy; University of Bologna - Rimini Center for Economic Analysis (RCEA)

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

Leventides, John and Loukaki, Kalliopi and Papavassiliou, Vassilios G., Simulating Financial Contagion Dynamics in Random Interbank Networks (December 24, 2018). Journal of Economic Behavior and Organization, Vol. 158, pp. 500-525, 2019, Available at SSRN: https://ssrn.com/abstract=3243061 or http://dx.doi.org/10.2139/ssrn.3243061

John Leventides

National and Kapodistrian University of Athens - Department of Economics ( email )

1, Sofokleous Str
Athens, GR- 10559
Greece

Kalliopi Loukaki

National and Kapodistrian University of Athens - Department of Economics ( email )

1, Sofokleous Str
Athens, GR- 10559
Greece

Vassilios G. Papavassiliou (Contact Author)

University College Dublin (UCD) - Michael Smurfit Graduate School of Business ( email )

Blackrock, Co. Dublin
Ireland

UCD Geary Institute for Public Policy ( email )

University College Dublin
Belfield, Dublin Dublin 4
Ireland

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

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