2013/08 | LEM Working Paper Series | |
Systemic Risk, Contagion, and Financial Networks: A Survey |
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Matteo Chinazzi, Giorgio Fagiolo |
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Keywords | ||
Systemic Risk, Contagion, Complex Networks, Resilience, Connectivity, Robust-yet-Fragile Networks, Financial and Economic Crisis
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JEL Classifications | ||
G01, G20, G32, C63
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Abstract | ||
The recent crisis has highlighted the crucial role that existing linkages among
banks and financial institutions plays in channeling and amplifying shocks hitting
the system. The structure and evolution of such web of linkages can be
fruitfully characterized using concepts borrowed from the theory of (complex)
networks. This paper critically surveys recent theoretical work that exploits
this concept to explain the sources of contagion and systemic risk in financial
markets. We taxonomize existing contributions according to the impact
of network connectivity, bank heterogeneity, existing uncertainty in financial
markets, portfolio composition of the banks. We end with a discussion of
the most important challenges faced by theoretical network-based models of
systemic risk. These include a better understanding of the causal links between
network structure and the likelihood of systemic risk and increasingly
using the empirical knowledge about real-world financial-network structures
to calibrate theoretical models.
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