Financial Contagion in Networks

Abstract

This chapter provides an introduction to the literature on financial contagion in networks. We aim to do this by focusing on a limited number of papers in some formal detail, trying to illustrate their analogies and differences as much as possible within a common framework. In the first part, the chapter considers contagion via transmission of shocks, such as abrupt drops in the flow of revenue to one firm, which affect other firms connected to it through financial linkages. The chapter then discusses informational contagion, understood as the process whereby a shock to one market is transmitted to other markets via the information revealed in the first market.

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