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AG Audience

English

60 Minutes

Saarbrücken

We perform an asymptotic analysis of insolvency cascades in financial networks. Using analytical methods, we derive an expression for the asymptotic size of a default cascade as a function of network characteristics. This result is used to obtain a criterion for the resilience of a large financial network to the default of a small group of financial institutions. Our results emphasize the role played by ``contagious exposures'' and show that institutions that are highly connected and over-exposed are those which contribute most to network instability in case of default. The asymptotic results are shown to be in good agreement with simulations for networks whose sizes are realistic, showing the relevance of the large network limit for analyzing default contagion.

Hamed Amini

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Epidemics, Random Graphs