Contagion in financial networks

Araujo, Gabriela De Carvalho Meira (2015). Contagion in financial networks Honours Thesis, School of Economics, The University of Queensland.

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Author Araujo, Gabriela De Carvalho Meira
Thesis Title Contagion in financial networks
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 2015-11-08
Thesis type Honours Thesis
Supervisor Shino Takayama
Total pages 228
Language eng
Subjects 14 Economics
140207 Financial Economics
Abstract/Summary This paper studies the consequences of a variety of exogenous shocks to organisations in random financial networks and explores the possibility of bank failure following an exogenous shock. We extend the framework from Elliott et al. (2014) by examining different failure costs, exogenous shocks, performing calibration analysis using data from the Bank of International Settlements (BIS) December 2014 Quarterly Review from 15 countries on cross-country debt and incorporating a safety net policy requirement. By expanding the theoretical model and the computational method from Elliott et al. (2014), we explore the effects of three exogenous shocks on organisations in financial networks and study how the probability of failure changes depending on key parameters of the model. The findings from this paper can serve as a tool to better understand how various factors affect bank failure in random financial networks, assist the risk management involved in promoting financial stability and the computer simulations give a more realistic understanding of bank failure under different states of the economy. Our simulation exercises suggest that an organisation can indeed fail after being hit by an exogenous shock and failure can propagate through the financial networks at a certain threshold value. In addition, the numerical simulations provide policy implications on the resilience of the network against exogenous shocks. Lastly, theoretically we show how inter-linkage between banks affects the risks that each bank is exposed to.
Keyword Exogenous shock
Financial networks
Bank failure

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Created: Thu, 14 Jan 2016, 10:21:52 EST by Heidi Ellis on behalf of School of Economics