Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153558
Authors: 
Kavonius, Ilja Kristian
Castrén, Olli
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1124
Abstract: 
The financial crisis has highlighted the need for models that can identify counterparty risk exposures and shock transmission processes at the systemic level. We use the euro area financial accounts (flow of funds) data to construct a sector-level network of bilateral balance sheet exposures and show how local shocks can propagate throughout the network and affect the balance sheets in other, even seemingly remote, parts of the financial system. We then use the contingent claims approach to extend this accounting-based network of interlinked exposures to risk-based balance sheets which are sensitive to changes in leverage and asset volatility. We conclude that the bilateral cross-sector exposures in the euro area financial system constitute important channels through which local risk exposures and balance sheet dislocations can be transmitted, with the financial intermediaries playing a key role in the processes. High financial leverage and high asset volatility are found to increase a sector’s vulnerability to shocks and contagion.
Subjects: 
Balance sheet contagion
contingent claims analysis
financial accounts
macro-prudential analysis
network models
systemic risk
JEL: 
C22
E01
E21
E44
F36
G01
G12
G14
Document Type: 
Working Paper

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