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Financial Contagion in Cross-holdings Networks: The Case of Ecuador

In: The Econometrics of Networks

Author

Listed:
  • Pablo Estrada
  • Leonardo Sánchez-Aragón

Abstract

Financial contagion refers to the propagation of shocks that can generate widespread failures. The authors apply a financial contagion model proposed by Elliott, Golub, and Jackson (2014) to a cross-shareholding network of firms in Ecuador. The authors use a novel dataset to study the potential channels for contagion. Although diversification is not high, results reveal enough conditions for a contagion event to occur. However, the low level of integration attenuates the effects of shocks. The authors run simulations affecting a particular firm at the time, and find that two firms coming from the finance and trade industry cause the highest contagion. In addition, when an entire industry receives a shock, trade and manufacturing industries contagion more companies than the rest. Finally, the model can assist policymakers to monitor the market and evaluate the fragility of the network in different scenarios.

Suggested Citation

  • Pablo Estrada & Leonardo Sánchez-Aragón, 2020. "Financial Contagion in Cross-holdings Networks: The Case of Ecuador," Advances in Econometrics, in: The Econometrics of Networks, volume 42, pages 265-292, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-905320200000042017
    DOI: 10.1108/S0731-905320200000042017
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    More about this item

    Keywords

    Financial contagion; cross-holding; network; cascade effects; F36; F65; G32; G33;
    All these keywords.

    JEL classification:

    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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