Financial Fragility and Distress Propagation in a Network of Regions

ETH Risk Center – Working Paper No. 12-016

37 Pages Posted: 21 Dec 2012

See all articles by Stefania Vitali

Stefania Vitali

Università Politecnica delle Marche - Faculty of Economics; Department of Physics, Università di Palermo, italy; ETH Zurich

Stefano Battiston

University of Zurich - Department of Banking and Finance; Swiss Finance Institute

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: October 11, 2012

Abstract

Building on previous works on business fluctuations, we model the propagation of financial distress in a network of regions, each populated by heterogeneous interacting firms and banks. In order to diversify risk, firm sell goods outside their own region and borrow from banks located there. However, this results in ties across regions which propagate financial distress across regional borders. We investigate how the average level of economic integration affects the probability of both individual and systemic failures. We find that the benefit of greater diversification is eventually offset by the effect of financial acceleration and contagion. In particular, beyond a certain level of integration the economy suffers more frequently from events with larger numbers of simultaneous failures.

Keywords: Networks, Financial Fragility, Contagion, Business Fluctuations, Bankruptcy, Financial Acceleration

JEL Classification: F4, E32, G01, L14

Suggested Citation

Vitali, Stefania and Battiston, Stefano and Gallegati, Mauro, Financial Fragility and Distress Propagation in a Network of Regions (October 11, 2012). ETH Risk Center – Working Paper No. 12-016. Available at SSRN: https://ssrn.com/abstract=2191565 or http://dx.doi.org/10.2139/ssrn.2191565

Stefania Vitali (Contact Author)

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

Department of Physics, Università di Palermo, italy ( email )

Viale delle Scienze, Ed. 17
Palermo, PA 90128
Italy

ETH Zurich ( email )

Weinbergstrasse 56/58
8092 Zurich, CH-1015
Switzerland

Stefano Battiston

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Mauro Gallegati

Università Politecnica delle Marche - Faculty of Economics ( email )

Piazzale Martelli, 8
60121 Ancona
Italy
++390712207188 (Phone)
++390712207102 (Fax)

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