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Debtrank Analysis of Financial Distress Propagation on a Production Network in Japan

RIETI Discussion Paper Series 16-E-046

17 Pages Posted: 8 Sep 2016  

Yoshi Fujiwara

University of Hyogo - Graduate School of Simulation Studies

Masaaki Terai

RIKEN

Yuji Fujita

Turnstone Research Institute, Inc

Wataru Souma

Nihon University

Date Written: March 1, 2016

Abstract

Supplier-customer relationship among firms in a production network is the arena where financial distress propagates from distressed debtors of customers to their creditors of suppliers. While the events of bankruptcies can be observed easily, the underlying contagion effect of financial distress can have considerable consequences such as a chain of bankruptcies.

DebtRank is a model to quantify the propagation of financial distress, which has been applied recently for analyzing and evaluating systemic risk for interbank contagion. Because the production network in Japan, which comprises more than one million of firms as nodes and millions of supplier-customer relationship as links, is much larger than the interbank credit network, it has been a formidable task to study the model of DebtRank on such a large-scale production network.

This work studies the financial distress propagation on the real data of production network by employing an implementation of DebtRank on a supercomputer. We found that the DebtRank of individual firms has a significant correlation with firm-size with non-linearity, indicating that the DebtRank for big firms becomes much larger than what is expected naively. The analysis for individual sector shows that depending on the sector's position in the upstream and downstream, its DebtRank deviates from a linear relationship between DebtRank and the sector-size. In addition, one can measure vulnerability by using the DebtRank analysis, which is potentially useful to identify likelihood of the failures of firms in more vulnerable sectors.

Keywords: Supplier-Customer Network, Systemic Risk, Supercomputer

JEL Classification: G01, C88

Suggested Citation

Fujiwara, Yoshi and Terai, Masaaki and Fujita, Yuji and Souma, Wataru, Debtrank Analysis of Financial Distress Propagation on a Production Network in Japan (March 1, 2016). RIETI Discussion Paper Series 16-E-046. Available at SSRN: https://ssrn.com/abstract=2834690

Yoshi Fujiwara (Contact Author)

University of Hyogo - Graduate School of Simulation Studies ( email )

7-1-28 Minato-jima, Minami-machi
Chuo-ku
Kobe, Hyogo 650-0047
Japan

Masaaki Terai

RIKEN ( email )

2-1 Hirosawa
Wako, Saitama 351-0198
United States

Yuji Fujita

Turnstone Research Institute, Inc ( email )

Japan

Wataru Souma

Nihon University ( email )

Tokyo
Japan

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