20 Pages Posted: 1 Mar 2011
Date Written: February 26, 2011
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.
Keywords: systemic risk, network flows, contagion, clearing
Suggested Citation: Suggested Citation
Pokutta, Sebastian and Schmaltz, Christian and Stiller, Sebastian, Measuring Systemic Risk and Contagion in Financial Networks (February 26, 2011). Available at SSRN: https://ssrn.com/abstract=1773089 or http://dx.doi.org/10.2139/ssrn.1773089