Overlapping portfolios, contagion, and financial stability

Journal article

We study the problem of interacting channels of contagion in financial networks. The first channel of contagion is counterparty failure risk; this is captured empirically using data for the Austrian interbank network. The second channel of contagion is overlapping portfolio exposures; this is studied using a stylized model. We perform stress tests according to different protocols. For the parameters we study neither channel of contagion results in large effects on its own. In contrast, when both channels are active at once, bankruptcies are much more common and have large systemic effects.

Authors: Caccioli, F; Farmer, J; Foti, N; Rockmore, D

• Publication status: Published
• Peer review status: Peer reviewed
• Publisher: Elsevier
• Journal: Journal of Economic Dynamics and Control
• Volume: 51
• Pages: 50-63
• Publication date: 2014-10-13
• Acceptance date: 2014-09-30
• DOI: 10.1016/j.jedc.2014.09.041
• EISSN: 1879-1743
• ISSN: 0165-1889
• Keywords: Systemic risk; SBTMR; Contagion; Network models