Supernetworks and Systemic Risk

34 Pages Posted: 31 Jan 2016

See all articles by Frank H. Page

Frank H. Page

Systemic Risk Centre, LSE; Indiana University, Bloomington - Department of Economics

Date Written: July 23, 2015

Abstract

We give a formal and computable definition of systemic risk that is firmly grounded in network dynamics and using our definition we show that the dynamics driving network formation generate a finite set of basins of attraction. The presence of basins of attraction has major implications for our understanding of systemic risk. First, we show that each basin is homogeneous with respect to its network failure characteristics. Second, we show that the profile of basins comes equipped with a unique set of tipping points. Thus, using our definition of systemic risk, we formally define the notion of a tipping point. Each tipping point is the gateway to some sequence of future networks leading inexorably to some basin, and depending on the failure characteristics of this basin, this sequence might best be described as a failure cascade. Thus, tipping points are the supernetwork’s early warning system for network failure. Finally, we define and characterize the notions of systemic and killer nodes. The big picture take away from our approach to systemic risk is that what is critical in assessing systemic risk is the allocation of failure levels across the basins of attraction.

Keywords: systemic risk, tipping points, systemic nodes, killer nodes, basins of attraction, Markov process, network formation

JEL Classification: C7

Suggested Citation

Page, Frank H., Supernetworks and Systemic Risk (July 23, 2015). Available at SSRN: https://ssrn.com/abstract=2724311 or http://dx.doi.org/10.2139/ssrn.2724311

Frank H. Page (Contact Author)

Systemic Risk Centre, LSE ( email )

Houghton St
London, WC2A 2AE
United Kingdom

HOME PAGE: http://www.systemicrisk.ac.uk/

Indiana University, Bloomington - Department of Economics ( email )

Wylie Hall
Bloomington, IN 47405-6620
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
74
Abstract Views
458
Rank
473,898
PlumX Metrics