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Systemic risk and financial networks

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  • Li, Bingqing
  • Zhang, Xiaoyuan

Abstract

We develop a network-based probabilistic model to analyze systemic risk within a network of interconnected institutions. Harnessing the power of economic connections, we construct a weighted network that effectively captures the extent of direct risk spillovers. Then the risk contagion probabilistic model is constructed with the aid of the risk orbit contagion idea and inter-institutional dependencies. Our model examines contagion characteristics, uncertainty, and interdependence, revealing that neither a ring nor a complete financial network is optimal. We discover that the expected loss of the network does not have a monotonic relationship with the number of partners, depending on the trade-off between the network density and direct risk spillovers to mitigate systemic risk.

Suggested Citation

  • Li, Bingqing & Zhang, Xiaoyuan, 2024. "Systemic risk and financial networks," The Quarterly Review of Economics and Finance, Elsevier, vol. 94(C), pages 25-36.
    • Handle: RePEc:eee:quaeco:v:94:y:2024:i:c:p:25-36
    DOI: 10.1016/j.qref.2023.12.012
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    More about this item

    Keywords

    Risk contagion; Network density; Optimal network; Risk orbits;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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