Event Details

As illustrated by recent empirical studies on the structure of links and exposures across financial institutions, financial counterparty networks exhibit complex heterogeneous structures with heavy-tailed degree distributions, asymmetric in- and out-degree distributions and heavy-tailed distribution of exposures. Using a network-based measure of default contagion - the Default Impact of an institution- and a measure of the systemic impact of its default in a stress scenario - the Contagion Index- we investigate the nature and magnitude of default contagion and systemic risk in financial systems. We find that default contagion, whose importance had been minimized in many previous studies, can be a major source of systemic risk if its magnitude is measured properly. Our study also reveals some interesting connections between network properties and the magnitude of systemic risk. Increasing the connectivity of the network is shown to increase the risk of default contagion. We also find that aggregate balance sheet data, such as the size of interbank assets, fail to explain the risk of contagion, and point to network-dependent quantities, such as the counterparty susceptibility and counterparty frailty, which could serve as efficient tools for monitoring and regulating systemic risk.(Joint work with Rama Cont)

Speaker: Amal Moussa, Columbia University (IEOR)

Slides: (TBA)