Simulating financial contagion dynamics in random interbank networks

Exchange rate shocks in multicurrency interbank markets

“…By applying the mechanics of an interbank market's exposure matrix to any possible initial default in this market, researchers can gauge how robust or fragile it is. Analyses of this kind have been carried out for many real-world interbank markets (e.g., Furfine (2003), Wells (2002), Upper & Worms (2004), Mistrulli (2011), Sheldon & Maurer (1998, Blåvarg & Nimander (2002), van Lelyveld & Liedorp (2006), Degryse & Nguyen (2007), Diez Canedo & Martínez Jaramillo (2009, for the interbank markets of the US, the UK, Ger-many, Italy, Switzerland, Sweden, the Netherlands, Belgium and Mexico, respectively) as well as simulated interbank markets (see, e.g., Iori et al 2006, Nier et al 2007, Roukny et al 2013, Leventides et al 2019.…”

“…Throughout, we follow Gai & Kapadia (2010) and Leventides et al (2019), who also work with simulated interbank markets, and assume that creditor banks cannot make any recoveries from defaults on their loans. In case a creditor bank now also experiences losses that are greater than its equity, domino-like knock-on defaults set in.…”

The Influence of Information Diffusion on Interbank Risk Contagion

“…erefore, the vast majority of studies have adopted the settlement payment vector that Eisenberg and Noe [8] proposed or its evolution model as the settlement base of counterparty risk contagion. Subsequent studies on counterparty risk contagion can be broadly divided into three aspects: how characteristics of interbank funding networks affect counterparty risk contagion [9][10][11][12][13][14], the evolution of the interbank funding network and counterparty risk contagion [15][16][17][18], and the empirical analysis and measurement of interbank risk contagion by applying the network method to various countries and regions [19][20][21][22][23][24].…”

Financial contagion in interbank networks

“…In Chapter 4 we develop an interbank network model and demonstrate how contagion p pa at d va c a c c th d f th y t m' heterogeneity, the balance sheet composition and the level of connectivity among ba k . Th chapt ba d th pap "S m lat f a c al c ta dy am c a d m t ba k tw k ", wh ch a j t w k w th M Vassilios G. Papavassiliou and has previously been published as Leventides et al (2019). Under this particular framework, we assume that the network structure in our model is arbitrary, that is, the network of interbank claims/obligations forms randomly.…”

“…Moreover, we circumvent the problem of data unavailability as real data on interbank exposures are generally only available to central bankers and regulators, thus rendering the empirical analysis of networks problematic. The first model, which is part of the paper Leventides et al (2019), examines the knock-on effects an initial default can bring into the interbank network under the assumption of randomness in the link formation. The assumption that the network of interbank claims and obligations forms randomly, enables us to capture all possible scenarios that may appear in real-world situations.…”