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Systemic risk, maximum entropy and interbank contagion

Author

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  • M. Andrecut

    (Calgary, Alberta, T3G 5Y8, Canada)

Abstract

We discuss the systemic risk implied by the interbank exposures reconstructed with the maximum entropy (ME) method. The ME method severely underestimates the risk of interbank contagion by assuming a fully connected network, while in reality the structure of the interbank network is sparsely connected. Here, we formulate an algorithm for sparse network reconstruction, and we show numerically that it provides a more reliable estimation of the systemic risk.

Suggested Citation

  • M. Andrecut, 2016. "Systemic risk, maximum entropy and interbank contagion," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 27(12), pages 1-14, December.
    • Handle: RePEc:wsi:ijmpcx:v:27:y:2016:i:12:n:s0129183116501485
    DOI: 10.1142/S0129183116501485
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    References listed on IDEAS

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    1. Simon Wells, 2004. "Financial interlinkages in the United Kingdom's interbank market and the risk of contagion," Bank of England working papers 230, Bank of England.
    2. repec:zbw:bofrdp:2009_006 is not listed on IDEAS
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    Cited by:

    1. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    2. Lin Zou & Lijuan Xie & Yuanjing Yang, 2019. "A Double-Layer Network and the Contagion Mechanism of China's Financial Systemic Risk," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 22(4), pages 1-9.

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