CREDIT RISK CONTAGION AND SYSTEMIC RISK ON NETWORKS

MARINA DOLFIN; DAMIAN KNOPOFF; MICHELE LIMOSANI; MARIA GABRIELLA XIBILIA

Mathematics

MDPI

Año: 2019 vol. 7

2227-7390

This paper proposes a model of the dynamics of credit contagion through non-performingloans on financial networks. Credit risk contagion is modeled in the context of the classical SIS(Susceptibles-Infected-Susceptibles) epidemic processes on networks but with a fundamental novelty.In fact, we assume the presence of two different classes of infected agents, and then we differentiatethe dynamics of assets subject to idiosyncratic risk from those affected by systemic risk by adoptinga SIIS (Susceptible-Infected1-Infected2-Susceptible) model. In the recent literature on this field, theeffect of systemic credit risk on the performance of the financial network is a hot topic. We performnumerical simulations intended to explore the roles played by two different network structures on thelong term behavior of assets affected by systemic risk in order to analyze the effect of the topology ofthe underlying network structure on the spreading of systemic risk on the structure. Random graphs,i.e., the Erdös-Rényi model, are considered ? benchmark?network structures whilst core-peripherystructures are often indicated in the literature as idealized structures, although they are able to captureinteresting, specific features of real-world financial networks. Moreover, as a matter of comparison,we also perform numerical experiments on small-world networks.