Abstract
Financial contagion is often observed in recent financial crisis, which illustrates a critical need for new and fundamental understanding of its dynamics. So in this paper we mainly focus on modeling and analysing the financial contagion in a system where a large number of financial institutions are randomly connected by the direct balance sheets linkages own to the lending or borrowing relationships. We propose a simple contagion algorithm to study the effect of several determinants, such as the topology of financial network, exposure ratio, leverage ratio, and the liquidation ratio. One of our finding is that the financial contagion is weaker as the growth of connectivity of network, so a financial system with a higher connectivity is more stability or robustness; we also find that the exposure ratio increases the risk of financial contagion, but both the leverage ratio and liquidation ratio has a negative relationship on financial contagion.
Paper Type
Event
Contagion in a Financial System
Financial contagion is often observed in recent financial crisis, which illustrates a critical need for new and fundamental understanding of its dynamics. So in this paper we mainly focus on modeling and analysing the financial contagion in a system where a large number of financial institutions are randomly connected by the direct balance sheets linkages own to the lending or borrowing relationships. We propose a simple contagion algorithm to study the effect of several determinants, such as the topology of financial network, exposure ratio, leverage ratio, and the liquidation ratio. One of our finding is that the financial contagion is weaker as the growth of connectivity of network, so a financial system with a higher connectivity is more stability or robustness; we also find that the exposure ratio increases the risk of financial contagion, but both the leverage ratio and liquidation ratio has a negative relationship on financial contagion.
Recommended Citation
Cheng, X., Liao, S., Xu,Y., Hua, Z., & Yang, D. (2015). Contagion in a Financial System. In D. Vogel, X. Guo, C. Barry, M. Lang, H. Linger, & C. Schneider (Eds.), Information Systems Development: Transforming Healthcare through Information Systems (ISD2015 Proceedings). Hong Kong, SAR: Department of Information Systems. ISBN: 978-962-442-393-8. http://aisel.aisnet.org/isd2014/proceedings2015/MDDConcepts/6.