Financial default contagion in a generalized block model by Thilo Meyer-Brandis (LMU Munich, visiting UCSB)

Event Date: 

Monday, March 12, 2018 - 3:30pm to 4:30pm

Title: Financial default contagion in a generalized block model



We extend analytic results on default contagion in large financial networks to capture a pronounced block model structure. This includes as a special case the Core-Periphery network, which played a prominent role in recent research on systemic risk. In the current literature on systemic risk in large random networks one problematic assumption is that the distribution of interbank liabilities only depends on the creditor. Under this assumption a straightforward law of large number argument allows to turn edge related random elements into deterministic vertex properties. We study a more general setting in which this argument breaks down and a direct asymptotic analysis of the edge weighted random graph becomes necessary. Among other applications our results allow us to obtain resilience conditions for the entire network (for example the global financial network) based on sub-network conditions. Contrasting earlier research we also give an example that demonstrates how reshuffling edge weights to form blocks can in fact impact resilience even for otherwise very homogeneous networks.