eprintid: 2687
rev_number: 7
eprint_status: archive
userid: 69
dir: disk0/00/00/26/87
datestamp: 2015-05-19 11:15:50
lastmod: 2015-05-19 11:15:50
status_changed: 2015-05-19 11:15:50
type: monograph
metadata_visibility: show
creators_name: Bardoscia, Marco
creators_name: Battiston, Stefano 
creators_name: Caccioli, Fabio
creators_name: Caldarelli, Guido
creators_id: 
creators_id: 
creators_id: 
creators_id: guido.caldarelli@imtlucca.it
title: DebtRank: A microscopic foundation for shock propagation
ispublished: submitted
subjects: HD61
divisions: EIC
full_text_status: none
monograph_type: working_paper
abstract: The DebtRank algorithm has been increasingly investigated as a method to estimate the impact of shocks in financial networks, as it overcomes the limitations of the traditional default-cascade approaches. Here we formulate a dynamical "microscopic" theory of instability for financial networks by iterating balance sheet identities of individual banks and by assuming a simple rule for the transfer of shocks from borrowers to lenders. By doing so, we generalise the DebtRank formulation, both providing an interpretation of the effective dynamics in terms of basic accounting principles and preventing the underestimation of losses on certain network topologies. Depending on the structure of leverages the dynamics is either stable, in which case the asymptotic state can be computed analytically, or unstable, meaning that at least a bank will default. We apply this results to a network of roughly 200 among the largest European banks in the period 2008 - 2013. We show that network effects generate an amplification of exogenous shocks of a factor ranging between three (in normal periods) and six (during the crisis), when we stress the system with a 0.5% shock on external (i.e. non-interbank) assets for all banks.
date: 2015-04
date_type: submitted
publisher: ArXiv
pages: 10
institution: IMT Institute for Advanced Studies Lucca
official_url: http://arxiv.org/abs/1504.01857
citation:   Bardoscia, Marco and Battiston, Stefano  and Caccioli, Fabio and Caldarelli, Guido  DebtRank: A microscopic foundation for shock propagation.  Working Paper   ArXiv       (Submitted)