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SUMMARY:How Likely is Contagion in Financial Networks? - Young\, P (Univer
 sity of Oxford)
DTSTART:20140829T123000Z
DTEND:20140829T130000Z
UID:TALK53939@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:Joint with P. Glasserman\n\nInterconnections among financial i
 nstitutions create potential channels for contagion and amplification of s
 hocks to the financial system. We estimate the extent towhich interconnect
 ions increase expected losses and defaults under a wide range of shock dis
 tributions. In contrast to most work on financial networks\, we assume onl
 y minimal information about network structure and rely instead on informat
 ion about the individual institutions that are the nodes of the network. T
 he key node-level quantities are asset size\, leverage\, and a financial c
 onnectivity measure given by the fraction of a financial institution's lia
 bilities held by other financial institutions. We combine these measures t
 o derive explicit bounds on the potential magnitude of network effects on 
 contagion and loss amplification. Spillover effects are most significant w
 hen node sizes are heterogeneous and the originating node is highly levera
 ged and has high financial connectivity. Our results also highlight the im
 portance of mechanisms that go beyond simple spillover effects to magnify 
 shocks\; these include bankruptcy costs\, and mark-to-market losses result
 ing from credit quality deterioration or a loss of confidence. We illustra
 te the results with data on the European banking system.\n
LOCATION:Seminar Room 1\, Newton Institute
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