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Title: Mapping systemic risk: Critical degree and failures distribution in financial networks
Authors: Smerlak, Matteo
Stoll, Brady L.
Gupta, Agam
Magdanz, James S.
Keywords: Systemic Risk
Financial Networks
Interbank Markets
Issue Date: 2015
Publisher: SCOPUS
Public Library of Science
Series/Report no.: 10(7)
Abstract: The financial crisis illustrated the need for a functional understanding of systemic risk in strongly interconnected financial structures. Dynamic processes on complex networks being intrinsically difficult to model analytically, most recent studies of this problem have relied on numerical simulations. Here we report analytical results in a network model of interbank lending based on directly relevant financial parameters, such as interest rates and leverage ratios. We obtain a closed-form formula for the "critical degree" (the number of creditors per bank below which an individual shock can propagate throughout the network), and relate failures distributions to network topologies, in particular scalefree ones. Our criterion for the onset of contagion turns out to be isomorphic to the condition for cooperation to evolve on graphs and social networks, as recently formulated in evolutionary game theory. This remarkable connection supports recent calls for a methodological rapprochement between finance and ecology. � 2015 Smerlak et al. This is an open access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
Description: Smerlak, Matteo, Perimeter Institute for Theoretical Physics, 31 Caroline Street North, Waterloo, ON N2L2Y5, Canada; Stoll, Brady L., Department of Mechanical Engineering, University of Texas at Austin, 204 E. Dean Keaton, Austin, TX 78712, United States; Gupta, Agam, Indian Institute of Management Calcutta, Diamond Harbour Road, Joka, Kolkata, West Bengal, 700104, India; Magdanz, James S., Resilience and Adaptation Program, University of Alaska Fairbanks, PO Box 757000, Fairbanks, AK 99775-7000, United States
ISSN/ISBN - 19326203
DOI - 10.1371/journal.pone.0130948
Appears in Collections:Management Information Systems

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