Resilience to Contagion in Financial Networks

40 Pages Posted: 19 Jun 2011 Last revised: 6 Oct 2012

See all articles by Hamed Amini

Hamed Amini

Ecole Polytechnique Fédérale de Lausanne

Rama Cont

University of Oxford; CNRS

Andreea Minca

Cornell University

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2010

Abstract

Propagation of insolvencies across financial institutions may be modeled as a cascade process on a network representing their mutual exposures. We derive rigorous asymptotic results for the magnitude of contagion in a large financial network and give an analytical expression for the asymptotic fraction of defaults, in terms of network characteristics. Our results extend previous studies on contagion in random graphs to inhomogeneous directed graphs with a given degree sequence and arbitrary distribution of weights. We introduce a criterion for the resilience of a large financial network to the insolvency of a small group of financial institutions and quantify how contagion amplifies small shocks to the network. Our results emphasize the role played by "contagious links'' and show that institutions which contribute most to network instability in case of default have both large connectivity and a large fraction of contagious links. The asymptotic results show good agreement with simulations for networks with realistic sizes.

Keywords: systemic risk, contagion, default, macroprudential regulation, financial stability, random graph, network model, financial networks, interconnectedness, balance-sheet contagion

JEL Classification: G01, G28, G18

Suggested Citation

Amini, Hamed and Cont, Rama and Minca, Andreea, Resilience to Contagion in Financial Networks (December 1, 2010). Available at SSRN: https://ssrn.com/abstract=1865997 or http://dx.doi.org/10.2139/ssrn.1865997

Hamed Amini

Ecole Polytechnique Fédérale de Lausanne ( email )

Station 5
Odyssea 1.04
1015 Lausanne, CH-1015
Switzerland

Rama Cont (Contact Author)

University of Oxford ( email )

Mathematical Institute
Oxford, OX2 6GG
United Kingdom

HOME PAGE: http://https://www.maths.ox.ac.uk/people/rama.cont

CNRS ( email )

LPSM
Sorbonne University
Paris
France

HOME PAGE: http://rama.cont.perso.math.cnrs.fr/

Andreea Minca

Cornell University ( email )

222 Rhodes Hall
Ithaca, NY NY 14853
United States

HOME PAGE: http://people.orie.cornell.edu/acm299/

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