Volume 106, Number 6, June 2014
|Number of page(s)||6|
|Section||Interdisciplinary Physics and Related Areas of Science and Technology|
|Published online||18 June 2014|
Systemic risk in dynamical networks with stochastic failure criterion
1 Faculty of Civil Engineering, University of Rijeka - 51000 Rijeka, Croatia
2 Zagreb School of Economics and Management - 10000 Zagreb, Croatia
3 Faculty of Economics, University of Ljubljana - 1000 Ljubljana, Slovenia
4 Faculty of Science, University of Zagreb - 10000 Zagreb, Croatia
5 Department of Economics, Sao Paulo State University (UNESP) - Araraquara, SP 14800-901 Brazil
6 Department of Physics and Center for Computational Science and Engineering, National University of Singapore Singapore 117546, Republic of Singapore
7 Department of Physics, Boston University - 590 Commonwealth Avenue, Boston, MA 02215, USA,
8 Center for Phononics and Thermal Energy Science, School of Physics Science and Engineering, Tongji University 200092, Shanghai, China
Received: 31 January 2014
Accepted: 21 May 2014
Complex non-linear interactions between banks and assets we model by two time-dependent Erdős-Renyi network models where each node, representing a bank, can invest either to a single asset (model I) or multiple assets (model II). We use a dynamical network approach to evaluate the collective financial failure —systemic risk— quantified by the fraction of active nodes. The systemic risk can be calculated over any future time period, divided into sub-periods, where within each sub-period banks may contiguously fail due to links to either i) assets or ii) other banks, controlled by two parameters, probability of internal failure p and threshold Th (“solvency” parameter). The systemic risk decreases with the average network degree faster when all assets are equally distributed across banks than if assets are randomly distributed. The more inactive banks each bank can sustain (smaller Th), the smaller the systemic risk —for some Th values in I we report a discontinuity in systemic risk. When contiguous spreading becomes stochastic ii) controlled by probability p2 —a condition for the bank to be solvent (active) is stochastic— the systemic risk decreases with decreasing p2. We analyse the asset allocation for the U.S. banks.
PACS: 89.90.+n – Other topics in areas of applied and interdisciplinary physics (restricted to new topics in section 89) / 89.75.-k – Complex systems
© EPLA, 2014
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