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Double cascade model of financial crises

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dc.contributor.author Hurd, Thomas R
dc.contributor.author Cellai, Davide
dc.contributor.author Melnik, Sergey
dc.contributor.author Shao, Quentin, H
dc.date.accessioned 2017-02-22T13:05:28Z
dc.date.issued 2016
dc.identifier.uri http://hdl.handle.net/10344/5550
dc.description peer-reviewed en_US
dc.description The full text of this article will not be available on ULIR until the embargo expires on the 25/7/2017
dc.description.abstract The scope of financial systemic risk research encompasses a wide range of interbank channels and effects, including asset correlation shocks, default contagion, illiquidity contagion, and asset fire sales. This paper introduces a financial network model that combines the default and liquidity stress mechanisms into a "double cascade mapping". The progress and eventual result of the crisis is obtained by iterating this mapping to its fixed point. Unlike simpler models, this model can therefore quantify how illiquidity or default of one bank influences the overall level of liquidity stress and default in the system. Large-network asymptotic cascade mapping formulas are derived that can be used for efficient network computations of the double cascade. Numerical experiments then demonstrate that these asymptotic formulas agree qualitatively with Monte Carlo results for large finite networks, and quantitatively except when the initial system is placed in an exceptional "knife-edge" configuration. The experiments clearly support the main conclusion that when banks respond to liquidity stress by hoarding liquidity, then in the absence of asset fire sales, the level of defaults in a financial network is negatively related to the strength of bank liquidity hoarding and the eventual level of stress in the network. en_US
dc.language.iso eng en_US
dc.relation Plexmath en_US
dc.relation.ispartofseries International Journal of Theoretical and Applied Finance;19, (5)
dc.relation.uri http://dx.doi.org/10.1142/S0219024916500412
dc.subject banking network en_US
dc.subject contagion en_US
dc.subject random graph en_US
dc.subject default en_US
dc.subject funding liquidity en_US
dc.subject liquidity hoarding en_US
dc.subject systemic risk en_US
dc.title Double cascade model of financial crises en_US
dc.type info:eu-repo/semantics/article en_US
dc.type.supercollection all_ul_research en_US
dc.type.supercollection ul_published_reviewed en_US
dc.date.updated 2017-02-22T12:54:17Z
dc.description.version ACCEPTED
dc.identifier.doi 10.1142/S0219024916500412
dc.contributor.sponsor Global Risk Institute for Financial Services in Toronto en_US
dc.contributor.sponsor Natural Sciences and Engineering Research Council of Canada en_US
dc.contributor.sponsor IRC en_US
dc.contributor.sponsor ERC en_US
dc.relation.projectid 11/PI/1026 en_US
dc.date.embargoEndDate 2017-07-25
dc.embargo.terms 2017-07-25 en_US
dc.rights.accessrights info:eu-repo/semantics/embargoedAccess en_US
dc.internal.rssid 2644287
dc.internal.copyrightchecked Yes
dc.identifier.journaltitle International Journal Of Theoretical And Applied Finance
dc.description.status peer-reviewed


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