Multichannel contagion and systemic stabilisation strategies in interconnected financial markets
Sergueiva, Antoaneta Chinthalapati, Raju Verousis, Thanos Chen, Louisa
Sergueiva, Antoaneta
Chinthalapati, Raju
Verousis, Thanos
Chen, Louisa
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2017
Journal
Quantitative Finance
Book
Publication Volume
17
Publication Issue
12
Publication Begin page
1885
Publication End page
1904
Publication NUmber of pages
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Abstract
To date, existing studies that use multilayer networks, in their multiplex form, to analyse the structure of financial systems, have (i) considered the structure as a non-interconnected multiplex network, (ii) no mechanism of multichannel contagion has been modelled and empirically evaluated and (iii) no multichannel stabilisation strategies for pre-emptive contagion containment have been designed. This paper formulates an interconnected multiplex structure, and a contagion mechanism among financial institutions due to bilateral exposures arising from institutions’ activity within different interconnected markets that compose the overall financial market. We design minimum-cost stabilisation strategies that act simultaneously on different markets and their interconnections, in order to effectively contain potential contagion progressing through the overall structure. The empirical simulations confirm their capability for containing contagion. The potential for multichannel contagion through the multiplex contributes more to systemic fragility than single-channel contagion, however, multichannel stabilisation also contributes more to systemic resilience than single-channel stabilisation.
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Keywords
Multichannel Contagion Mechanism, Multiple-Market Stabilisation Strategies, Interconnected Multiplex, Systemic RIsk, Systemic Resilience