Systemic risk through contagion in a core-periphery structured banking network
Volume 104 / 2015
Banach Center Publications 104 (2015), 133-149
MSC: Primary 60K35, 60H30, 91B30.
DOI: 10.4064/bc104-0-7
Abstract
We contribute to the understanding of how systemic risk arises in a network of credit-interlinked agents. Motivated by empirical studies we formulate a network model which, despite its simplicity, depicts the nature of interbank markets better than a symmetric model. The components of a vector Ornstein–Uhlenbeck process living on the nodes of the network describe the financial robustnesses of the agents. For this system, we prove a LLN for growing network size leading to a propagation of chaos result. We state properties which arise from such a structure, and examine the effect of asymmetry on several risk management issues and the possibility of contagion.
