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Measuring Systemic Risk and Contagion in Financial Networks

20 Pages Posted: 1 Mar 2011  

Sebastian Pokutta

Georgia Institute of Technology

Christian Schmaltz

University of Aarhus; True North Institute

Sebastian Stiller

Massachusetts Institute of Technology (MIT)

Date Written: 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.

Keywords: systemic risk, network flows, contagion, clearing

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

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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