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Financial contagion in inter-bank networks with overlapping portfolios

  • Peilong Shen
  • Zhinan LiEmail author
Regular Article
  • 23 Downloads

Abstract

By considering overlapping portfolios among financial institutions, we construct a financial contagion model for inter-bank networks with two channels of contagion: counter-party risk and common asset holdings risk. Based on the model, we verify the contribution of overlapping portfolios to systemic risk contagion and further analyse how the degree of diversification and initial shock affect the probability, extent and loss degree of contagion in different network structures. The results show that as the degree of diversification increases, the probability, extent and loss degree show overall inverted U-shaped tendencies. Different from the existing research that focuses only on a single channel of risk contagion, we find that the risk contagion is significant because of the combined effect of counter-party risk and common asset holdings risk, even though there is little portfolio overlap. Additionally, we study the core–periphery network to investigate the particularity of systematically important financial institutions and the feedback effect in financial networks when banks proactively reduce the exposure of depreciating assets.

Keywords

Systemic risk Contagion Financial network Overlapping portfolios 

JEL Classification

G01 G11 

Notes

Funding

This research was supported by the National Social Science Foundation of China (Grant No. 18BJY231).

Compliance with ethical standards

Conflict of interest

The authors have no conflicts of interest to declare.

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2019

Authors and Affiliations

  1. 1.School of FinanceShanxi University of Finance and EconomicsTaiyuan CityChina

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