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We present a network model of the interbank market in which optimizing risk averse banks lend to each other and invest in non-liquid assets. Market clearing takes place through a tâtonnement process which yields the equilibrium price, while traded quantities are determined by means of a matching algorithm. We compare three alternative matching algorithms: maximum entropy, closest matching and random matching. Contagion occurs through liquidity hoarding, interbank interlinkages and fire sale externalities. The resulting network configurations exhibits a core-periphery structure, dis-assortative behavior and low clustering coefficient. We measure systemic importance by means of network centrality and input-output metrics and the contribution of systemic risk by means of Shapley values. Within this framework we analyze the effects of prudential policies on the stability/efficiency trade-off. Liquidity requirements unequivocally decrease systemic risk but at the cost of lower efficiency (measured by aggregate investment in non-liquid assets); equity requirements tend to reduce risk (hence increase stability) without reducing significantly overall investment.
We use consumer price data for 205 cities/regions in 21 countries to study deviations from the law-of-one-price before, during and after the major currency crises of the 1990s. We combine data from industrialised nations in North America (Unites States, Canada, Mexico), Europe (Germany, Italy, Spain and Portugal) and Asia (Japan, Korea, New Zealand, Australia) with corresponding data from emerging market economies in the South America (Argentine, Bolivia, Brazil, Columbia) and Asia (India, Indonesia, Malaysia, Philippines, Taiwan, Thailand). We confirm previous results that both distance and border explain a significant amount of relative price variation across different locations. We also find that currency attacks had major disintegration effects by significantly increasing these border effects, and by raising within country relative price dispersion in emerging market economies. These effects are found to be quite persistent since relative price volatility across emerging markets today is still significantly larger than a decade ago. JEL classification: F40, F41
We develop a dynamic network model with heterogenous banks which undertake optimizing portfolio decisions subject to liquidity and capital constraints and trade in the interbank market whose equilibrium is governed by a tatonnement process. Due to the micro-funded structure of the decisional process as well as the iterative dynamic adjustment taking place in the market, the links in the network structures are endogenous and evolve dynamically. We use the model to assess the diffusion of systemic risk (measured as default probability), the contribution of each bank to it as well as the evolution of the network in response to financial shocks and across different prudential policy regimes.
We develop a dynamic network model with heterogenous banks which undertake optimizing portfolio decisions subject to liquidity and capital constraints and trade in the interbank market whose equilibrium is governed by a tatonnement process. Due to the micro-funded structure of the decisional process as well as the iterative dynamic adjustment taking place in the market, the links in the network structures are endogenous and evolve dynamically. We use the model to assess the diffusion of systemic risk, the contribution of each bank to it as well as the evolution of the network in response to financial shocks and across different prudential policy regimes.
We develop a dynamic network model whose links are governed by banks' optmizing decisions and by an endogenous tâtonnement market adjustment. Banks in our model can default and engage in firesales: risk is transmitted through direct and cascading counterparty defaults as well as through indirect pecuniary externalities triggered by firesales. We use the model to assess the evolution of the network configuration under various prudential policy regimes, to measure banks' contribution to systemic risk (through Shapley values) in response to shocks and to analyze the effects of systemic risk charges. We complement the analysis by introducing the possibility of central bank liquidity provision.
Moulages are contact media – images made by contagion in the most literal sense: their production relies on a process in which the object to be reproduced is touched by the reproducing material. In the case of dermatological moulages, the plaster touches the infected skin of the sick and, once dried, serves as the negative form for the waxen image of a disease. Focussing on the collection of the Hôpital Saint-Louis in Paris, the article situates the production of dermatological moulages within the visual culture of 19th-century medicine and raises the question how an ancient technique of image production could become such a prevalent tool for the documentation of skin diseases during a period usually associated with the rise of scientific medicine and a reconsideration of theories of contagion in medical aetiology.
This paper analyses cross-border contagion in a sample of European banks from January 1994 to January 2003. We use a multinomial logit model to estimate the number of banks in a given country that experience a large shock on the same day (“coexceedances”) as a function of variables measuring common shocks and coexceedances in other countries. Large shocks are measured by the bottom 95th percentile of the distribution of the first difference in the daily distance to default of the bank. We find evidence in favour of significant cross-border contagion. We also find some evidence that since the introduction of the euro cross-border contagion may have increased. The results seem to be very robust to changes in the specification.
The banking system is highly interconnected and these connections can be conveniently represented as an interbank network. This survey presents a systematic overview of the recent advances in the theoretical literature on interbank networks. We assess our current understanding of the structure of interbank networks, of how network characteristics affect contagion in the banking system and of how banks form connections when faced with the possibility of contagion and systemic risk. In particular, we highlight how the theoretical literature on interbank networks offers a coherent way of studying interconnections, contagion processes and systemic risk, while emphasizing at the same time the challenges that must be addressed before general results on the link between the structure of the interbank network and financial stability can be established. The survey concludes with a discussion of the policy relevance of interbank network models with a special focus on macroprudential policies and monetary policy.
This paper presents evidence that spillovers through shifts in bank lending can help explain the pattern of contagion. To test the role of bank lending in transmitting currency crises we examine a panel of data on capital flows to 30 emerging markets disaggregated by 11 banking centers. In addition we study a cross-section of emerging markets for which we construct a number of measures of competition for bank funds. For the Mexican and Asian crises, we find that the degree to which countries compete for funds from common bank lenders is a fairly robust predictor of both disaggregated bank flows and the incidence of a currency crisis. In the Russian crisis, the common bank lender helps to predict the incidence of contagion but there is also evidence of a generalized outflow from all emerging markets. We test extensively for robustness to sample, specification and definition of the common bank lender effect. Overall our findings suggest that spillovers through banking centers may be more important in explaining contagion than similarities in macro-economic fundamentals and even than trade linkage.
We use consumer price data for 205 cities/regions in 21 countries to study PPP deviations before, during and after the major currency crises of the 1990s. We combine data from industrialized nations in North America (Unites States, Canada and Mexico), Europe (Germany, Italy, Spain and Portugal), Asia (Japan and South Korea), and Oceania (Australia and New Zealand) with corresponding data from emerging market economies in South America (Argentina, Bolivia, Brazil, Columbia) and Asia (India, Indonesia, Malaysia, Philippines, Taiwan, Thailand). By doing so, we confirm previous results that both distance and border explain a significant amount of relative price variation across different locations. We also find that currency attacks had major disintegration effects by considerably increasing these border effects and by raising within-country relative price dispersion in emerging market economies. These effects are found to be quite persistent since relative price volatility across emerging markets today is still significantly larger than a decade ago.