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Distress propagation in complex networks: the case of non-linear DebtRank

Bardoscia, M; Caccioli, F; Perotti, JI; Vivaldo, G; Caldarelli, G; (2016) Distress propagation in complex networks: the case of non-linear DebtRank. PLoS ONE , 11 (10) , Article e0163825. 10.1371/journal.pone.0163825. Green open access

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Abstract

We consider a dynamical model of distress propagation on complex networks, which we apply to the study of financial contagion in networks of banks connected to each other by direct exposures. The model that we consider is an extension of the DebtRank algorithm, recently introduced in the literature. The mechanics of distress propagation is very simple: When a bank suffers a loss, distress propagates to its creditors, who in turn suffer losses, and so on. The original DebtRank assumes that losses are propagated linearly between connected banks. Here we relax this assumption and introduce a one-parameter family of non-linear propagation functions. As a case study, we apply this algorithm to a data-set of 183 European banks, and we study how the stability of the system depends on the non-linearity parameter under different stress-test scenarios. We find that the system is characterized by a transition between a regime where small shocks can be amplified and a regime where shocks do not propagate, and that the overall stability of the system increases between 2008 and 2013.

Type: Article
Title: Distress propagation in complex networks: the case of non-linear DebtRank
Open access status: An open access version is available from UCL Discovery
DOI: 10.1371/journal.pone.0163825
Publisher version: http://dx.doi.org/10.1371/journal.pone.0163825
Language: English
Additional information: Copyright: © 2016 Bardoscia et al. This is an open access article distributed under the terms of the Creative Commons Attribution License (https://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.
UCL classification: UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Computer Science
URI: http://discovery.ucl.ac.uk/id/eprint/1520274
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