Stress testing the resilience of financial networks

Hamed Amini 1 Rama Cont 2 Andreea Minca 3, 2
1 TREC - Theory of networks and communications
DI-ENS - Département d'informatique de l'École normale supérieure, ENS Paris - École normale supérieure - Paris, Inria Paris-Rocquencourt
3 MATHFI - Financial mathematics
Inria Paris-Rocquencourt, ENPC - École des Ponts ParisTech, UPEC UP12 - Université Paris-Est Créteil Val-de-Marne - Paris 12
Abstract : We propose a simulation-free framework for stress testing the resilience of a financial network to external shocks affecting balance sheets. Whereas previous studies of contagion effects in financial networks have relied on large scale simulations, our approach uses a simple analytical criterion for resilience to contagion, based on an asymptotic analysis of default cascades in heterogeneous networks. In particular, our methodology does not require to observe the whole network but focuses on the characteristics of the network which contribute to its resilience. Applying this framework to a sample network, we observe that the size of the default cascade generated by a macroeconomic shock across balance sheets may exhibit a sharp transition when the magnitude of the shock reaches a certain threshold: Beyond this threshold, contagion spreads to a large fraction of the financial system. An upper bound is given for the threshold in terms of the characteristics of the network. http://www.worldscientific.com/doi/abs/10.1142/S0219024911006504
Type de document :
Article dans une revue
International Journal of Theoretical and Applied Finance, World Scientific Publishing, 2012, 15 (1), pp.1250006-1250026. <10.1142/S0219024911006504>
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Contributeur : Rama Cont <>
Soumis le : samedi 16 mars 2013 - 23:52:38
Dernière modification le : mardi 11 octobre 2016 - 15:20:06

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Hamed Amini, Rama Cont, Andreea Minca. Stress testing the resilience of financial networks. International Journal of Theoretical and Applied Finance, World Scientific Publishing, 2012, 15 (1), pp.1250006-1250026. <10.1142/S0219024911006504>. <hal-00801538>

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