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