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Contagion in financial systems: A Bayesian network approach

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  • Carsten Chong
  • Claudia Kluppelberg

Abstract

We develop a structural default model for interconnected financial institutions in a probabilistic framework. For all possible network structures we characterize the joint default distribution of the system using Bayesian network methodologies. Particular emphasis is given to the treatment and consequences of cyclic financial linkages. We further demonstrate how Bayesian network theory can be applied to detect contagion channels within the financial network, to measure the systemic importance of selected entities on others, and to compute conditional or unconditional probabilities of default for single or multiple institutions.

Suggested Citation

  • Carsten Chong & Claudia Kluppelberg, 2017. "Contagion in financial systems: A Bayesian network approach," Papers 1702.04287, arXiv.org, revised Jul 2017.
    • Handle: RePEc:arx:papers:1702.04287
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    References listed on IDEAS

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    Cited by:

    1. Aditya Maheshwari & Andrey Sarantsev, 2017. "Modeling Financial System with Interbank Flows, Borrowing, and Investing," Papers 1707.03542, arXiv.org, revised Oct 2018.

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