Default Cascades in Complex Networks: Topology and Systemic Risk

• DOI: 10.1038/srep02759
• Publication Date: 2013-09-26T09:13:17Z
• Authors: Tarik Roukny; Hugues Bersini; Hugues Pirotte; Guido Caldarelli; Stefano Battiston
• Keywords: Risk; 1000 Multidisciplinary; Economics; QA75 Electronic computers. Computer science; Computational science; 05 social sciences; 10003 Department of Finance; Complex networks; Models, Theoretical; Sciences de l'ingénieur; 01 natural sciences; Article; 330 Economics; Applied physics; QC Physics; Phase transitions and critical phenomena; Informatique mathématique; 0103 physical sciences; 0502 economics and business; Phase transitions and critical phenomena; Computational science; Complex networks; Applied physics

Scientific Reports, 3<br/>The recent crisis has brought to the fore a crucial question that remains still open: what would be the optimal architecture of financial systems? We investigate the stability of several benchmark topologies in a simple default cascading dynamics in bank networks. We analyze the interplay of several crucial drivers, i.e., network topology, banks' capital ratios, market illiquidity, and random vs targeted shocks. We find that, in general, topology matters only – but substantially – when the market is illiquid. No single topology is always superior to others. In particular, scale-free networks can be both more robust and more fragile than homogeneous architectures. This finding has important policy implications. We also apply our methodology to a comprehensive dataset of an interbank market from 1999 to 2011.<br/>ISSN:2045-2322<br/>