On global stability of financial networks

Abstract

Recent crisis in the global financial world has 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 over-the-counter derivatives market, define a suitable global stability measure for this model, and perform a comprehensive 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 parameter 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 www2.cs.uic.edu/dasgupta/financial-simulator-files.

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