On Global Stability of Financial Networks

TL;DR

This paper extends a financial network model to assess global stability, introduces a stability measure, and empirically evaluates it across numerous network configurations to identify fragility indicators.

Contribution

It formalizes an extended model of financial networks, defines a global stability measure, and provides a comprehensive empirical analysis with practical software tools.

Findings

Identifies topological properties linked to fragility

Provides a stability measure applicable to various network types

Offers software for stability computation

Abstract

The recent financial crisis have generated renewed interests in fragilities of global financial networks among economists and regulatory authorities. In particular, a potential vulnerability of the financial networks is the "financial contagion" process in which insolvencies of individual entities propagate through the "web of dependencies" to affect the entire system. In this paper, we formalize an extension of a financial network model originally proposed by Nier et al. for scenarios such as the OTC derivatives market, define a suitable global stability measure for this model, and perform a comprehensive empirical evaluation of this stability measure over more than 700,000 combinations of networks types and parameter combinations. Based on our evaluations, we discover many interesting implications of our evaluations of this stability measure, and derive topological properties and parameters combinations that may be used to flag the network as a possible fragile network. An interactive software FIN-STAB for computing the stability is available from the website www2.cs.uic.edu/~dasgupta/financial-simulator-files