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The Dynamics of Financial Stability in Complex Networks
Company: European Physical Journal B
Year Of Publication: 2012
Month Of Publication: July
Pages: 9
Download Count: 12
View Count: 1285
Comment Num: 0
Language: English
Source: article
Who Can Read: Free
Date: 8-3-2012
Publisher: Administrator
Summary
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 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 hi
Author(s)
Lind, Pedro G. Sign in to follow this author
da Cruz, Joao P. Sign in to follow this author
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