How the interbank market becomes systemically dangerous: an agent-based network model of financial distress propagation

Serri, Matteo; Caldarelli, Guido; Cimini, Giulio

doi:10.21314/jntf.2017.025

Cited by 8 publications

(8 citation statements)

References 19 publications

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“…However, the interbank market is rather sensitive to market movements, and it can dry up under exceptional circumstances (Brunnermeier, 2009)-becoming a main vehicle for distress propagation within the financial system (Acharya and Merrouche, 2013;Angelini et al, 2011;Berrospide, 2013). Indeed, during the 2007/2008 global financial crisis, worries of counterparty creditworthiness and fire sales spillovers led banks to hoard liquidity, causing the freeze of credit to the financial system and the real economy (Adrian and Shin, 2010;Diamond and Rajan, 2009;Gale and Yorulmazer, 2013;Krause and Giansante, 2012;Serri et al, 2017).…”

Section: Introductionmentioning

confidence: 99%

Structural changes in the interbank market across the financial crisis from multiple core–periphery analysis

Kojaku¹,

Cimini²,

Caldarelli³

et al. 2018

JNTF

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Interbank markets are often characterised in terms of a core-periphery network structure, with a highly interconnected core of banks holding the market together, and a periphery of banks connected mostly to the core but not internally. This paradigm has recently been challenged for short time scales, where interbank markets seem better characterised by a bipartite structure with more core-periphery connections than inside the core. Using a novel core-periphery detection method on the eMID interbank market, we enrich this picture by showing that the network is actually characterised by multiple core-periphery pairs. Moreover, a transition from core-periphery to bipartite structures occurs by shortening the temporal scale of data aggregation. We further show how the global financial crisis transformed the market, in terms of composition, multiplicity and internal organisation of core-periphery pairs. By unveiling such a fine-grained organisation and transformation of the interbank market, our method can find important applications in the understanding of how distress can propagate over financial networks. Key messages• We study the eMID interbank market using a novel core-periphery detection method to unveil its high-order network organization.• We reveal multiple core-periphery pairs, and detect both tiered and bow-tie (bipartite) structures.• We reveal a topological transition of the market at the global financial crisis, in terms of network segregation and organization. *

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Section: Introductionmentioning

confidence: 99%

Structural changes in the interbank market across the financial crisis from multiple core–periphery analysis

Kojaku¹,

Cimini²,

Caldarelli³

et al. 2018

JNTF

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“…Price impact Securities Investment Nier et al (2007) exponential † single long Gai and Kapadia (2010) exponential † single long Arinaminpathy et al (2012) exponential † multiple ‡ long Cont and Wagalath (2013) linear multiple long/short Huang et al (2013) linear multiple long Caccioli et al (2014) exponential † multiple long Di Gangi et al (2018) linear multiple ‡ long Greenwood et al (2015) linear multiple long Caccioli et al (2015) linear single long Battiston et al (2016) linear multiple long Serri et al (2016) linear multiple long Cont and Schaanning (2017) linear multiple long Table 1: A survey of price impact functions and portfolio investment constraints utilised in shared-asset models of financial contagion. †corresponds to "linear market impact for log-prices" (Caccioli et al, 2014, p.238).…”

Section: Papermentioning

confidence: 99%

Understanding flash crash contagion and systemic risk: A micro–macro agent-based approach

Paulin

Calinescu

Wooldridge

2019

Journal of Economic Dynamics and Control

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The purpose of this paper is to advance the understanding of the conditions that give rise to flash crash contagion, particularly with respect to overlapping asset portfolio crowding. To this end, we designed, implemented, and assessed a hybrid micro-macro agent-based model, where price impact arises endogenously through the limit order placement activity of algorithmic traders. Our novel hybrid microscopic and macroscopic model allows us to quantify systemic risk not just in terms of system stability, but also in terms of the speed of financial distress propagation over intraday timescales. We find that systemic risk is strongly dependent on the behaviour of algorithmic traders, on leverage management practices, and on network topology. Our results demonstrate that, for high-crowding regimes, contagion speed is a non-monotone function of portfolio diversification. We also find the surprising result that, in certain circumstances, increased portfolio crowding is beneficial to systemic stability. We are not aware of previous studies that have exhibited this phenomenon, and our results establish the importance of considering non-uniform asset allocations in future studies. Finally, we characterise the time window available for regulatory interventions during the propagation of flash crash distress, with results suggesting ex ante precautions may have higher efficacy than ex post reactions.

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“…The interplay of all of these factors has affected the stability of the financial system (Glasserman and Young, 2016;Upper, 2011) that have become so much prone to shock propagation and then to unexpected failure knock-on effects. Starting from the pioneering models of Eisenberg and Noe (2001); Furfine (2003), an increasing stream of literature have focused on the development of new dynamics and metrics to describe the spread of financial distress over the network (Amini et al, 2016;Bardoscia et al, 2015Bardoscia et al, , 2017Battiston et al, 2012b;Brandi et al, 2018;Cifuentes et al, 2005;Cimini and Serri, 2016;Cimini et al, 2015a;Diamond and Rajan, 2001;Elsinger et al, 2013;Hurd et al, 2016;Kapadia et al, 2012;Krause and Giansante, 2012;Nier et al, 2007;Serri et al, 2017). The aim of these models is not only to assess the systemic risk but also understand which features and how their interplays are involved in the system robustness and resilience against shock spreading.…”

Section: Contagion Processmentioning

confidence: 99%

Systemic liquidity contagion in the European interbank market

Macchiati,

Brandi,

Cimini

et al. 2019

Preprint

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Systemic liquidity risk, defined by the IMF as "the risk of simultaneous liquidity difficulties at multiple financial institutions", is a key topic in macroprudential policy and financial stress analysis. Specialized models to simulate funding liquidity risk and contagion are available but they require not only banks' bilateral exposures data but also balance sheet data with sufficient granularity, which are hardly available. Alternatively, risk analyses on interbank networks have been done via centrality measures of the underlying graph capturing the most interconnected and hence more prone to risk spreading banks. In this paper, we propose a model which relies on an epidemic model which simulate a contagion on the interbank market using the funding liquidity shortage mechanism as contagion process. The model is enriched with country and bank risk features which take into account the heterogeneity of the interbank market. The proposed model is particularly useful when full set of data necessary to run specialized models is not available. Since the interbank network is not fully available, an economic driven reconstruction method is also proposed to retrieve the interbank network by constraining the standard reconstruction methodology to real financial indicators. We show that the contagion model is able to reproduce systemic liquidity risk across different years and countries. This result suggests that the proposed model can be successfully used as a valid alternative to more complex ones.

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How the interbank market becomes systemically dangerous: an agent-based network model of financial distress propagation

Cited by 8 publications

References 19 publications

Structural changes in the interbank market across the financial crisis from multiple core–periphery analysis

Structural changes in the interbank market across the financial crisis from multiple core–periphery analysis

Understanding flash crash contagion and systemic risk: A micro–macro agent-based approach

Systemic liquidity contagion in the European interbank market

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