Skip to main content
SpringerLink
Log in

How is Systemic Risk Amplified by Three Typical Financial Networks

  • Published:
Journal of the Operations Research Society of China Aims and scope Submit manuscript

Abstract

Financial institutions are typically tied together via inter-liability, portfolio overlapping and share cross-holding. These connections among financial institutions constitute the three most common financial networks, which may lead to financial risk contagion and even systemic risk when some institutions suffer shock. In this paper, firstly, for a given shock, we prove the existence of the equilibrium clearing vector of the financial system characterized by these three typical financial networks. Then, we mathematically derive an analytical form to show how these three contagion channels jointly affect and amplify the loss of the non-default institutions, and explain how the lack of liquidity of external investment assets exacerbates the loss caused by portfolio overlapping. Finally, the influence of the characteristics of financial network on risk contagion is verified by numerical simulation. These results provide basis for understanding the financial systemic risk contagion in the real world.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6

Similar content being viewed by others

References

  1. Allen, F., Gale, D.: Financial contagion. J. Polit. Econ. 108(1), 1–33 (2000)

    Article  Google Scholar 

  2. Eisenberg, L., Noe, T.H.: Systemic risk in financial systems. Manage. Sci. 47(2), 236–249 (2001)

    Article  Google Scholar 

  3. Glasserman, P., Young, H.P.: How likely is contagion in financial networks? J. Bank. Financ. 50, 383–399 (2015)

    Article  Google Scholar 

  4. Veraart, L.A.M.: Distress and default contagion in financial networks. Math. Financ. 30(3), 705–737 (2020)

    Article  MathSciNet  Google Scholar 

  5. Khabazian, A., Peng, J.M.: Vulnerability analysis of the financial network. Manage. Sci. 65(7), 3302–3321 (2019)

    Article  Google Scholar 

  6. Luo, H.Z., Ding, X.D., Peng, J.M., Jiang, R.J., Li, D.: Complexity results and effective algorithms for worst-case linear optimization under uncertainties. INFORMS J. Comput. 33(1), 180–197 (2021)

    Article  MathSciNet  Google Scholar 

  7. Cifuentes, R., Ferrucci, G., Shin, H.S.: Liquidity risk and contagion. J. Eur. Econ. Assoc. 3(2/3), 556–566 (2005)

    Article  Google Scholar 

  8. Amini, H., Filipović, D., Minca, A.: Uniqueness of equilibrium in a payment system with liquidation costs. Oper. Res. Lett. 44(1), 1–5 (2016)

    Article  MathSciNet  Google Scholar 

  9. Chen, N., Liu, X., Yao, D.D.: An optimization view of financial systemic risk modeling: network effect and market liquidity effect. Oper. Res. 64(5), 1089–1108 (2016)

    Article  MathSciNet  Google Scholar 

  10. Feinstein, Z.: Financial contagion and asset liquidation strategies. Oper. Res. Lett. 45(2), 109–114 (2017)

    Article  MathSciNet  Google Scholar 

  11. Ma, J.L., Zhu, S.S., Wu, Y.: Joint effect of liability network and portfolio overlapping on financial systemic risk: contagion and rescue. Quant. Financ. 21(5), 753–770 (2021)

    Article  Google Scholar 

  12. Caccioli, F., Shrestha, M., Moore, C., Farmer, J.D.: Stability analysis of financial contagion due to overlapping portfolios. J. Bank. Financ. 46, 233–245 (2014)

    Article  Google Scholar 

  13. Elliott, M., Golub, B., Jackson, M.O.: Financial networks and contagion. Am. Econ. Rev. 104(10), 3115–3153 (2014)

    Article  Google Scholar 

  14. Weber, S., Weske, K.: The joint impact of bankruptcy costs, fire sales and cross-holdings on systemic risk in financial networks. Probab. Uncert. Quant. Risk 2(1), 1–38 (2017)

    Article  MathSciNet  Google Scholar 

  15. Ma, J.L., Zhu, S.S., Li, D.: Net liability based clearing mechanism for measuring financial systemic risk. https://www.researchgate.net/publication/357621802 (2021)

  16. Amini, H., Minca, A.: Inhomogeneous financial networks and contagious links. Oper. Res. 64(5), 1109–1120 (2016)

    Article  MathSciNet  Google Scholar 

  17. Breman, A., Plemmons, R.T.: Nonnegative Matrices in the Mathematical Sciences. Academic Press, San Diego (1979)

    Google Scholar 

  18. Horn, R.A., Johnson, C.R.: Topics in Matrix Analysis. Cambridge University Press, Cambridge (1991)

    Book  Google Scholar 

  19. Acemoglu, D., Ozdaglar, A., Tahbaz-Salehi, A.: Systemic risk and stability in financial networks. Am. Econ. Review. 102(2), 564–609 (2015)

    Article  Google Scholar 

  20. Erdős, P., Rényi, A.: On random graphs I. Publicationes Mathematicae Debrecen. 6, 290–297 (1959)

    MathSciNet  MATH  Google Scholar 

Download references

Acknowledgements

The authors wish to thank the anonymous reviewers and the editor Professor David Yao for providing suggestions and comments which helped to improve the final version of this paper.

Author information

Authors and Affiliations

  1. College of Big Data Statistics, Guizhou University of Finance and Economics, Guiyang, 550025, GuiZhou, China

    Jia-Li Ma

  2. School of Business, Sun Yat-Sen University, Guangzhou, 510275, Guangdong, China

    Shu-Shang Zhu & Xiao-Chuan Pang

Authors
  1. Jia-Li Ma
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Shu-Shang Zhu
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Xiao-Chuan Pang
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Shu-Shang Zhu.

Additional information

This paper is dedicated to the late Professor Duan Li in commemoration of his contributions to optimization, financial engineering, and risk management.

This work was partially supported by the Natural Science Foundation of Guangdong Province (No. 2114050002944) and The National Natural Science Foundation of China (No. 71721001).

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Ma, JL., Zhu, SS. & Pang, XC. How is Systemic Risk Amplified by Three Typical Financial Networks. J. Oper. Res. Soc. China 10, 579–598 (2022). https://doi.org/10.1007/s40305-021-00389-y

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40305-021-00389-y

Keywords

Mathematics Subject Classification

Search

Navigation