Dynamical Macroprudential Stress Testing Using Network Theory

52 Pages Posted: 24 Aug 2015

See all articles by Dror Y. Kenett

Dror Y. Kenett

Financial Industry Regulatory Authority (FINRA); Johns Hopkins University

Sary Levy Carciente

Boston University; Academia Nacional de Ciencias Economicas; Universidad Central de Venezuela

Adam Avakian

Boston University

H. Eugene Stanley

Boston University - Center for Polymer Studies

Shlomo Havlin

Bar Ilan University

Date Written: June 18, 2015

Abstract

The increasing frequency and scope of financial crises have made global financial stability one of the major concerns of economic policy and decision makers. This has led to the understanding that financial and banking supervision has to be thought of as a systemic task, focusing on the interdependent relations among the institutions. Using network theory, we develop a dynamic model that uses a bipartite network of banks and their assets to analyze the system’s sensitivity to external shocks in individual asset classes and to evaluate the presence of features underlying the system that could lead to contagion. As a case study, we apply the model to stress test the Venezuelan banking system from 1998 to 2013. The introduced model was able to capture monthly changes in the structure of the system and the sensitivity of bank portfolios to different external shock scenarios and to identify systemic vulnerabilities and their time evolution. The model provides new tools for policy makers and supervision agencies to use for macroprudential dynamical stress testing.

Keywords: Financial Networks, Interdependence, Contagion, Banking

JEL Classification: G21, D85, N26, G18

Suggested Citation

Kenett, Dror Y. and Levy Carciente, Sary and Avakian, Adam and Stanley, H. Eugene and Havlin, Shlomo, Dynamical Macroprudential Stress Testing Using Network Theory (June 18, 2015). Office of Financial Research Working Paper No. 15-12, Available at SSRN: https://ssrn.com/abstract=2648467 or http://dx.doi.org/10.2139/ssrn.2648467

Dror Y. Kenett (Contact Author)

Financial Industry Regulatory Authority (FINRA) ( email )

Washington, DC
United States

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Sary Levy Carciente

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Academia Nacional de Ciencias Economicas ( email )

Palacio de las Academias
Caracas, DC 1010
Venezuela

Universidad Central de Venezuela ( email )

University City
Los Chaguaramos
Caracas, 1050
Venezuela

HOME PAGE: http://www.sarylevy.com

Adam Avakian

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

H. Eugene Stanley

Boston University - Center for Polymer Studies ( email )

Boston, MA 02215
United States

Shlomo Havlin

Bar Ilan University ( email )

Ramat Gan
Ramat Gan, 52900
Israel

HOME PAGE: http://havlin.biu.ac.il/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
133
Abstract Views
1,069
rank
235,312
PlumX Metrics