Systemic Risk, Contagion, and Financial Networks: A Survey

57 Pages Posted: 2 Apr 2013 Last revised: 11 Jun 2015

See all articles by Matteo Chinazzi

Matteo Chinazzi

Northeastern University - Laboratory for the Modeling of Biological and Socio-Technical Systems (MOBS Lab)

Giorgio Fagiolo

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Date Written: June 3, 2015

Abstract

The recent crisis has highlighted the crucial role that existing linkages among banks and financial institutions plays in channeling and amplifying shocks hitting the system. The structure and evolution of such web of linkages can be fruitfully characterized using concepts borrowed from the theory of (complex) networks. This paper critically surveys recent theoretical work that exploits this concept to explain the sources of contagion and systemic risk in financial markets. We taxonomize existing contributions according to the impact of network connectivity, bank heterogeneity, existing uncertainty in financial markets, portfolio composition of the banks. We end with a discussion of the most important challenges faced by theoretical network-based models of systemic risk. These include a better understanding of the causal links between network structure and the likelihood of systemic risk and increasingly using the empirical knowledge about real-world financial-network structures to calibrate theoretical models.

Keywords: Systemic Risk, Contagion, Complex Networks, Resilience, Connectivity, Robust-yet-Fragile Networks, Financial and Economic Crisis

JEL Classification: G01, G20, G32, C63

Suggested Citation

Chinazzi, Matteo and Fagiolo, Giorgio, Systemic Risk, Contagion, and Financial Networks: A Survey (June 3, 2015). Available at SSRN: https://ssrn.com/abstract=2243504 or http://dx.doi.org/10.2139/ssrn.2243504

Matteo Chinazzi

Northeastern University - Laboratory for the Modeling of Biological and Socio-Technical Systems (MOBS Lab) ( email )

220 B RP
Boston, MA 02115
United States

Giorgio Fagiolo (Contact Author)

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

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