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A network model of financial system resilience

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  • Anand, Kartik
  • Gai, Prasanna
  • Kapadia, Sujit
  • Brennan, Simon
  • Willison, Matthew

Abstract

We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents - domestic banks, international financial institutions, and firms. Calibrating the model to advanced country banking sector data, we obtain sensible aggregate loss distributions which are bimodal in nature. We demonstrate how systemic crises may occur and analyze how our results are influenced by firesale externalities and the feedback effects from curtailed lending in the macroeconomy. We also illustrate the resilience of our model financial system to stress scenarios with sharply rising corporate default rates and falling asset prices.

Suggested Citation

  • Anand, Kartik & Gai, Prasanna & Kapadia, Sujit & Brennan, Simon & Willison, Matthew, 2011. "A network model of financial system resilience," SFB 649 Discussion Papers 2011-051, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2011-051
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    More about this item

    Keywords

    contagion; financial crises; network models; systemic risk;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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