It is now generally accepted that the origins of the U. The spectacular growth of this sector in the early s and its subsequent decline led to widespread financial turbulence for the banking industry. Yet, the sudden decline of this market triggered the most widespread financial market decline since Consequently, the question of how such a small sector created such a global financial crisis and economic recession has spawned a burgeoning literature. The extant literature has already shown that banking crisis often have severe repercussions for the real economy. Bernanke shows that banking crashes have the potential to trigger recessionary periods in the real economy and this is backed up by empirical evidence presented in Reinhart and Rogoff , even though Dwyer et al.
Financial Contagion and Network Analysis
Financial Networks and Contagion - American Economic Association
Financial contagion is traditionally defined as a situation in which a shock that initially affects only a few financial institutions spreads, or spills over, to the rest of the financial system and the economy, subsequently infecting the financial systems and economies of other countries. Because of its clear importance to the global economy, this phenomenon is one of the most widely researched areas of finance and has implications for portfolio management, trading, hedging, and diversification strategies. The Global Financial Crisis provided myriad examples of how contagion spreads. Like a physical disease, contagious financial panics hurt not just those directly affected, but the entire system.
Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. DOI: Summer Published Economics Review of Financial Economics Network models of interbank exposures allow the mapping of the complex web of financial linkages among many institutions and address issues of system stability and contagion risk. Although existing models cover a fair amount of ground in explaining how network structure can lead to default cascades and in quantifying the likelihood and the impact of default cascades through balance-sheet mechanics, the literature has shortcomings in explaining how shocks are potentially amplified through the… Expand.
This part gives an overview of the concepts of connectedness, contagion, and correlation, the three Cs of systemic risk. For a detailed literature review on these concepts, see the appendix. Connectedness describes the concern that the failure of one bank will cause the failure of others through balance sheet links.