Risk diversification and default cascades in financial networks

Stefano Battiston, Chair of Systems Design - ETH Zurich, Suisse
28 avril 2011 de 11h à 12h en salle 25-26/101
We introduce a discrete dynamics of distress propagation in networks. The formulation combines a diffusion and a contact process which are relevant to complex networks in general. In particular it is more suitable than previous  models to describe contagion processes occurring in the financial system. Our results indicate that diversification of risk at the individual level can have an ambiguous effect on the global level, leading in some cases to higher systemic risk. Moreover, we show that the same structure can be resilient or fragile depending on the relative strength of the two processes at play. In the financial context, this corresponds to the level of optimism in the market. Thus, our work has interesting implications for the debate on the network architecture that is most resilient to financial crises.
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