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Risk contagion in multilayer network of financial markets

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  • Wang, Hu
  • Li, Shouwei

Abstract

After the financial crisis, the non-central clearing is proposed for the reform of the OTC derivatives market, and the margin system is also implemented for OTC derivatives transactions without central clearing to reduce systemic risk. In this paper, a risk contagion model including the OTC derivatives market and the interbank market is built, and the effects of introducing non-central clearing on systemic risk of banks is studied by using the data in the Balance Sheet of banks in China in 2017. The results show that the introduction of non-central clearing does not necessarily reduce systemic risk. Under low impact conditions, systemic risk and the number of defaulting banks under non-central clearing conditions are smaller than that without non-central clearing. Under extreme conditions, systemic risk and the number of defaulting banks are larger than that without non-central clearing when the central clearing proportion is low. Under both conditions, increasing the central clearing proportion can reduce systemic risk and the number of defaulting banks. The network structure of the OTC derivatives market and the interbank market will affect systemic risk. Systemic risk and the number of defaulting banks will decrease with the increase of the network density, and the existence of large risk exposure will significantly increase systemic risk and the number of defaulting banks.

Suggested Citation

  • Wang, Hu & Li, Shouwei, 2020. "Risk contagion in multilayer network of financial markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 541(C).
    • Handle: RePEc:eee:phsmap:v:541:y:2020:i:c:s037843711931862x
    DOI: 10.1016/j.physa.2019.123325
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    Cited by:

    1. Yan, Chun & Ding, Yi & Liu, Wei & Liu, Xinhong & Liu, Jiahui, 2023. "Multilayer interbank networks and systemic risk propagation: Evidence from China," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 628(C).
    2. Jiajia, Liu & Kun, Guo & Fangcheng, Tang & Yahan, Wang & Shouyang, Wang, 2023. "The effect of the disposal of non-performing loans on interbank liquidity risk in China: A cash flow network-based analysis," The Quarterly Review of Economics and Finance, Elsevier, vol. 89(C), pages 105-119.

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