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Title: Contagion in interacting financial networks
Authors: Zhulyaeva, Alena
Supervisors: Ladley, Daniel
Jensen, Martin
Award date: 11-Apr-2017
Presented at: University of Leicester
Abstract: I model financial network of investors, banks and insurance company. Investors provide some investments as a debt to banks. Banks invest in an outside risky assets and they are potentially interconnected with each other via over-the-counter (OTC) contracts to diversify their portfolio. The insurance company (IC) provides credit default swap contracts (CDS) to banks. Therefore, OTC and CDS might be channels for shock propagation in the financial network. CDS were one of the main financial instruments due to which different financial institutions were interconnected with each other during the global financial crisis 2007-2008 caused severe damage for the whole financial system. I investigate whether CDS reduce or enlarge systemic risk in interacting financial networks. Using computational model with banks hedging their asset risk via CDS, I identified that when the risk weighting on risky assets is small, banks and the whole network benefit from buying CDS since the number of defaults is less than in the case of not buying CDS. When the probability of risky project’s defaults is approximately in the interval [0.5, 0.6], we have the minimum number of bank defaults. Since financial institutions are linked with each other via OTC and CDS and a shock or default of one bank can affect multiple other banks, all banks benefit from a reduction in the number of bank defaults.
Type: Thesis
Level: Masters
Qualification: MPhil
Rights: Copyright © the author. All rights reserved.
Appears in Collections:Leicester Theses
Theses, Dept. of Economics

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