Abstract
In this study, we extend the model developed in Leventides et al. (J Econ Behav Organ 158:500–525, 2019) to include a wide variety of network topologies and provide a better understanding of the relation between network structure, banks’ characteristics and interbank contagion. While the focus of this paper is on the various factors that affect interbank contagion such as bank capital ratios, leverage, interconnectedness and homogeneity across banks’ sizes, the model lacks flexibility as far as the variability of the networks links is concerned. In order to circumvent this problem, we introduce the Erdős–Rényi probabilistic network model in our study to provide a wider vicinity of scenarios concerning the network structure of the interbank system and study how homogeneity within the interbank network affects the propagation of financial distress from one institution to the other parts of the system through bilateral exposures.
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Notes
- 1.
We refer the interested reader to Appendix in Leventides et al. [5] for a formalization of the aforementioned mechanism in a pseudocode which simulates the default cascade in the interbank network.
- 2.
Although those ranges have been selected arbitrarily, they are not sensitive to any regression model employed in the following analysis and thus, our regression results will be unaffected from a qualitative point of view if different ranges are used.
- 3.
See Wooldridge (2003) for an interesting discussion on standardization and explanation of the absence of the standardized intercept.
- 4.
It should be highlighted that in the Erdős–Rényi network structure the outdegree equals the indegree since we have an undirected network structure. However, in our framework, the two directions of the same link are given different weights.
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Loukaki, K., Boufounou, P., Leventides, J. (2021). Financial Contagion in Interbank Networks: The Case of Erdős–Rényi Network Model. In: Rassias, T.M. (eds) Nonlinear Analysis, Differential Equations, and Applications. Springer Optimization and Its Applications, vol 173. Springer, Cham. https://doi.org/10.1007/978-3-030-72563-1_13
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