Empirical Network Contagion for U.S. Financial Institutions

61 Pages Posted: 7 Nov 2017

See all articles by Fernando Duarte

Fernando Duarte

Federal Reserve Bank of New York

Collin Jones

Federal Reserve Banks - Federal Reserve Bank of New York

Date Written: 2017-11-01

Abstract

We construct an empirical measure of expected network spillovers that arise through default cascades for the U.S. financial system for the period 2002-16. Compared to existing studies, we include a much larger cross section of U.S. financial firms that comprises all bank holding companies, all broker-dealers, and all insurance companies, and consider their entire empirical balance sheet exposures instead of relying on simulations or on exposures arising just through one specific market (like the fed funds market) or one specific financial instrument (like credit default swaps). We find negligible expected spillovers from 2002 to 2007 and from 2013 to 2016. However, between 2008 and 2012, we find that default spillovers can amplify expected losses by up to 25 percent, a significantly higher estimate than previously found in the literature.

Keywords: systemic risk, contagion, financial network

JEL Classification: D85, G21

Suggested Citation

Duarte, Fernando and Jones, Collin, Empirical Network Contagion for U.S. Financial Institutions (2017-11-01). FRB of NY Staff Report No. 826, Available at SSRN: https://ssrn.com/abstract=3066693

Fernando Duarte (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://www.newyorkfed.org/research/economists/duarte/index.html

Collin Jones

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

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