Reconstructing and Stress Testing Credit Networks
44 Pages Posted: 12 Dec 2017
Date Written: December 8, 2017
Financial networks are an important source of systemic risk, but often only partial network information is available. In this paper, we use data on bank-firm credit relationships in Japan and conduct a horse race between different network reconstruction methods in terms of their ability to reproduce the actual credit networks. We then compare the different reconstruction methods in terms of their implied systemic risk levels. In most instances we find that the observed credit network significantly displays the highest systemic risk level. Lastly, we explore different policies to improve the robustness of the system.
Keywords: network reconstruction; systemic risk; bipartite credit network; aggregation level
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