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Network Models of Financial Contagion: A Definition and Literature Review

Author

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  • G. WIMS
  • D. MARTENS
  • M. DE BACKER
Abstract
Determining the risk of contagious failures due to credit exposures between organisations is a problem that has been the subject of a growing body of literature in recent years. The network model has become a commonly used tool, applied to both theoretical and empirical studies of financial contagion and systemic risk. The purpose of this paper is twofold. First, we propose a definition of the ‘Financial System Network’ which may be used to define the characteristics of any specific implementation of a network model in this field. Secondly, we evaluate the network models created by other researchers and compare and contrast various aspects of these implementations. We conclude by exploring avenues for future research in the area.

Suggested Citation

  • G. Wims & D. Martens & M. De Backer, 2011. "Network Models of Financial Contagion: A Definition and Literature Review," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/730, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:11/730
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    File URL: http://wps-feb.ugent.be/Papers/wp_11_730.pdf
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    References listed on IDEAS

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    2. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
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    7. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
    8. Mistrulli, Paolo Emilio, 2011. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1114-1127, May.
    9. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
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    11. Co-Pierre Georg & Jenny Poschmann, 2010. "Systemic risk in a network model of interbank markets with central bank activity," Jena Economics Research Papers 2010-033, Friedrich-Schiller-University Jena.
    12. James, Christopher, 1991. "The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-1242, September.
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    Cited by:

    1. Tamás Sebestyén & Dóra Longauer, 2018. "Network structure, equilibrium and dynamics in a monopolistically competitive economy," Netnomics, Springer, vol. 19(3), pages 131-157, December.

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