Network structure, portfolio diversification and systemic risk

Li, Shouwei; Wang, Chao

doi:10.1016/j.jmse.2021.06.006

Cited by 11 publications

(3 citation statements)

References 47 publications

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“…Moreover, they could adjust their international portfolio diversification based on their network structures [29]. For example, for a low level of portfolio diversification, banks could be more resilient to systematic risk if the diversification is low; while for a high level of portfolio diversification, banks could be more resilient to systematic risk if the diversification is high [32]. The subtle level to determine whether it was a higher or lower level may be difficult.…”

Section: Discussionmentioning

confidence: 99%

Research on the 2008 Financial Crisis Regarding Financial Network

Ding

2023

AEMPS

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The rapid withdrawal in the financial market due to the collapse of Silicon Valley Banks in 2023 brought reflections on the 2008 financial crisis. Past research has focused on modeling different types of financial networks that help explain bankruptcys contagion process. This paper discusses how these networks help to explain the 2008 financial crisis, followed by shedding light on the global impacts (European, Latin American, and Asian markets) of the crisis in terms of networks. The last section further discusses potential policies that could be used to prevent or predict severe contagion depending on different network structures, including adjusting the level of portfolio diversification for international investment, for example. This paper sheds light on the importance of financial networks regarding their contagion channel and wide application in the real economy.

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Section: Discussionmentioning

confidence: 99%

Research on the 2008 Financial Crisis Regarding Financial Network

Ding

2023

AEMPS

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“…[ 31 ] performs a computer-based simulation, and Ref. [ 32 ] investigates the European scenario, on top of some contributions tailored to specific sectors, such as re-insurance [ 33 ], real estate [ 34 ], and portfolio diversification [ 35 ]. Our contribution is intended to fill this gap, by applying scale-free networks to modelling the effects of bankruptcy outbreaks across the banking sector.…”

Section: Related Workmentioning

confidence: 99%

Propagation of Bankruptcy Risk over Scale-Free Economic Networks

Andria

Tollo

Kalda

2022

Entropy

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The propagation of bankruptcy-induced shocks across domestic and global economies is sometimes very dramatic; this phenomenon can be modelled as a dynamical process in economic networks. Economic networks are usually scale-free, and scale-free networks are known to be vulnerable with respect to targeted attacks, i.e., attacks directed towards the biggest nodes of the network. Here we address the following question: to what extent does the scale-free nature of economic networks and the vulnerability of the biggest nodes affect the propagation of economic shocks? We model the dynamics of bankruptcies as the propagation of financial contagion across the banking sector over a scale-free network of banks, and perform Monte-Carlo simulations based on synthetic networks. In addition, we analyze the public data regarding the bankruptcy of US banks from the Federal Deposit Insurance Corporation. The dynamics of the shock propagation is characterized in terms of the Bank Failures Diffusion Index, i.e., the average number of new bankruptcies triggered by the bankruptcy of a single bank, and in terms of the Shannon entropy of the whole network. The simulation results are in-line with the empirical findings, and indicate the important role of the biggest banks in the dynamics of economic shocks.

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“…The higher the proportion of banks' interbank assets, the stronger the contagion effect on the entire banking system. Chao Wang (2021) shows that the effect of portfolio diversification on banking systemic risk depends on the type of the interbank network and the nature of the shock. Wang et al (2022) finds that the over similarity of investment assets hold by banks constitutes the main cause of systemic risk.…”

Section: Introductionmentioning

confidence: 99%

Cascading bankruptcies under simultaneous sectorial shocks: Theory and application to the Tunisian banking sector

Nabi

Fersi

2022

Int. J Fin Econ

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This paper proposes a theoretical framework modelling the effect of simultaneous sectorial shocks on the banking system resilience, in presence of overlapping portfolio risk. A sectorial shock decreases the value of banks' assets and solvency. We show that beyond a determined threshold, the regulator (central bank) shall intervene in order to avoid that simultaneous sectorial shocks lead to bankruptcies in a cascading process. The model is simulated in the context of the Tunisian banking system for a variety of extreme macroeconomic conditions (economic recession and inflation). The simulations show that the simultaneous shocks to industry, commerce and real estate sectors might lead to the bankruptcies of one to 10 banks among the 23 Tunisian banks via the cascading contagion channel, in the absence of a prompt and adequate intervention by the regulator.

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Network structure, portfolio diversification and systemic risk

Cited by 11 publications

References 47 publications

Research on the 2008 Financial Crisis Regarding Financial Network

Research on the 2008 Financial Crisis Regarding Financial Network

Propagation of Bankruptcy Risk over Scale-Free Economic Networks

Cascading bankruptcies under simultaneous sectorial shocks: Theory and application to the Tunisian banking sector

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