Abstract

http://ssrn.com/abstract=1773089
 
 

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Measuring Systemic Risk and Contagion in Financial Networks


Sebastian Pokutta


Georgia Institute of Technology

Christian Schmaltz


University of Aarhus; True North Institute

Sebastian Stiller


Massachusetts Institute of Technology (MIT)

February 26, 2011


Abstract:     
Liabilities between financial entities form a network. The clearing of liabilities and thereby contagion of risk and default depend on this network structure. We provide an accurate and unrestricted mathematical model to understand clearing and propagated default in financial networks. This yields a precise measure for the systemic risk induced by individual financial entities. Moreover, the model allows to compute optimal bailout strategies that either minimize the cost of the intervention or maximize the stabilizing effect for a given bailout budget. Finally, the computational efficiency of the model allows to analyze very large scale networks quickly.

Number of Pages in PDF File: 20

Keywords: systemic risk, network flows, contagion, clearing

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Date posted: March 1, 2011  

Suggested Citation

Pokutta, Sebastian and Schmaltz, Christian and Stiller, Sebastian, Measuring Systemic Risk and Contagion in Financial Networks (February 26, 2011). Available at SSRN: http://ssrn.com/abstract=1773089 or http://dx.doi.org/10.2139/ssrn.1773089

Contact Information

Sebastian Pokutta (Contact Author)
Georgia Institute of Technology ( email )
Atlanta, GA 30332
United States
Christian Schmaltz
University of Aarhus ( email )
Nordre Ringgade 1
Aarhus, DK-8000
Denmark
True North Institute ( email )
145-157 St. John Street
London, EC1V 4PY
United Kingdom
+49-17621761996 (Phone)
HOME PAGE: http://www.tninstitute.eu
Sebastian Stiller
Massachusetts Institute of Technology (MIT) ( email )
77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States
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