Contagion in Financial Networks: A Threat Index

This paper proposes to measure the spillover effects that cross liabilities generate on the magnitude of default in a system of financially linked institutions. Based on a simple model and an explicit criterion—the aggregate debt repayments—the measure is defined for each institution, affected by it...

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Bibliographic Details
Published in:Management science 2018-02, Vol.64 (2), p.955-970
Main Author: Demange, Gabrielle
Format: Article
Language:English
Subjects:
Debt
Default
Economics and Finance
Externalities (Economics)
financial linkages
Financial services
Financial services industry
Humanities and Social Sciences
intervention policy
Laws, regulations and rules
Liabilities
propagation of defaults
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Description
Summary:This paper proposes to measure the spillover effects that cross liabilities generate on the magnitude of default in a system of financially linked institutions. Based on a simple model and an explicit criterion—the aggregate debt repayments—the measure is defined for each institution, affected by its characteristics and links to others. These measures—one for each institution—summarize relevant information on the interaction between the liabilities structure and the shocks to resources, and they can be useful to determine optimal intervention policies. The approach is illustrated to evaluate the consolidated foreign claims of 10 European Union countries. This paper was accepted by Amit Seru, finance .
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2016.2592