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The dynamics of financial stability in complex networks

Regular Article

Abstract

We address the problem of banking system resilience by applying off-equilibrium statistical physics to a system of particles, representing the economic agents, modelled according to the theoretical foundation of the current banking regulation, the so called Merton-Vasicek model. Economic agents are attracted to each other to exchange ‘economic energy’, forming a network of trades. When the capital level of one economic agent drops below a minimum, the economic agent becomes insolvent. The insolvency of one single economic agent affects the economic energy of all its neighbours which thus become susceptible to insolvency, being able to trigger a chain of insolvencies (avalanche). We show that the distribution of avalanche sizes follows a power-law whose exponent depends on the minimum capital level. Furthermore, we present evidence that under an increase in the minimum capital level, large crashes will be avoided only if one assumes that agents will accept a drop in business levels, while keeping their trading attitudes and policies unchanged. The alternative assumption, that agents will try to restore their business levels, may lead to the unexpected consequence that large crises occur with higher probability.

Keywords

Statistical and Nonlinear Physics 

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Copyright information

© EDP Sciences, SIF, Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  1. 1.Departamento de FísicaFaculdade de Ciências da Universidade de LisboaLisboaPortugal
  2. 2.Closer Consultoria Lda, Avenida Engenheiro Duarte PachecoLisboaPortugal
  3. 3.Center for Theoretical and Computational PhysicsUniversity of LisbonLisbonPortugal

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