29 January: Andrea Toto (QSMS Seminar)

Presenting “The effects of connectivity and centralization of financial networks on their exposure to default contagion” at 12:15-13:30 in QA406.


On 29 January  2020, we have Andrea Toto of Free University of Bozen-Bolzano visiting us. He is going to give a seminar titled “The effects of connectivity and centralization of financial networks on their exposure to
default contagion at 12:15-13:30 in room A406 in Building Q, Budapest University of Technology and Economics, Faculty of Economic and Social Sciences, Magyar tudósok körútja 2, 1117 Budapest. Sandwiches will be provided. Please help the organisers by registering in advance at egervari.zsuzsanna@qsms.bme.hu Registration is free.
Also, see our Facebook event.

Abstract: This paper studies the effects that connectivity and centralisation have on the response of interbank networks to external shocks that generate phenomena of default contagion. We run numerical simulations of contagion processes on randomly generated networks, characterised by different degrees of density and centralisation.
We find that the more densely connected a network is, the more it displays a `robust-yet-fragile’ nature, in the sense that it is entirely resilient to small shocks while being exposed to the risk of a systemic crisis (the default of all banks in the network) in the case of large shocks. We obtain similar results from tests on the effects of centralisation. The more centralised a network is, the more it is robust-yet-fragile to shocks. We also find that the more sparse and decentralised a network is, like a ring network, the more it displays a `vulnerable-yet-resilient’ nature. That is, the network is exposed to episodes of local contagion due to relatively small shocks, whereas it is resilient to large shocks, facing little risk of a complete systemic crisis. Our results also indicate that having large banks in central positions of interbank networks has a stabilising effect.