Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/313205 
Authors: 
Year of Publication: 
2023
Citation: 
[Journal:] Mathematics and Financial Economics [ISSN:] 1862-9660 [Volume:] 17 [Issue:] 1 [Publisher:] Springer [Place:] Berlin, Heidelberg [Year:] 2023 [Pages:] 1-21
Publisher: 
Springer, Berlin, Heidelberg
Abstract: 
This article presents a model of the financial system as an inhomogeneous random financial network (IRFN) with N nodes that represent different types of institutions such as banks or funds and directed weighted edges that signify counterparty relationships between nodes. The onset of a systemic crisis is triggered by a large exogenous shock to banks’ balance sheets. Their behavioural response is modelled by a cascade mechanism that tracks the propagation of damaging shocks and possible amplification of the crisis, and leads the system to a cascade equilibrium. The mathematical properties of the stochastic framework are investigated for the first time in a generalization of the Eisenberg–Noe solvency cascade mechanism that accounts for fractional bankruptcy charges. New results include verification of a “tree independent cascade property” of the solvency cascade mechanism, and culminate in an explicit recursive stochastic solvency cascade mapping conjectured to hold in the limit as the number of banks N goes to infinity. It is shown how this cascade mapping can be computed numerically, leading to a rich picture of the systemic crisis as it evolves toward the cascade equilibrium.
Subjects: 
Systemic risk
Banking network
Random financial network
Cascade
Interbank exposure
Funding liquidity
Insolvency
Locally tree-like
Persistent Identifier of the first edition: 
Creative Commons License: 
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Document Type: 
Article
Document Version: 
Published Version

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