Financial Network and Systemic Risk -- A Dynamic Model

Production and Operations Management, Forthcoming

40 Pages Posted: 18 Feb 2021

See all articles by Hong Chen

Hong Chen

Shanghai Advanced Institute in Finance, Shanghai Jiao Tong University

Tan Wang

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

David Yao

Columbia University

Date Written: January 22, 2021

Abstract

We develop a dynamic model to study the systemic risk of the banking network, so as to study the dynamics of bank defaults. In contrast to the existing literature, we show that while the possibility of contagion is determined by interconnectedness of the financial network, whether a financial crisis can occur depends on the profile of the liquid assets of the banks in the system. Based on the dynamic model, we introduce a time to crisis index that allows us to predict the occurrence of a financial crisis. We then provide an intuitive measure of systemic risk. To illustrate the potential usefulness of our model, we provide an analysis of the system of twenty two German banks. We show how many of the banks are fundamentally weak, where the contagion effect may arise from, how strong the contagion effect is, and how significant the systemic risk is.

Keywords: systemic risk, network, dynamic model

JEL Classification: G01, G2, G21

Suggested Citation

Chen, Hong and Wang, Tan and Yao, David, Financial Network and Systemic Risk -- A Dynamic Model (January 22, 2021). Production and Operations Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3771035

Hong Chen

Shanghai Advanced Institute in Finance, Shanghai Jiao Tong University ( email )

Shanghai, 200052
China

Tan Wang (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

David Yao

Columbia University ( email )

New York, NY
United States

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

Paper statistics

Downloads
145
Abstract Views
347
Rank
379,851
PlumX Metrics