Identifying Contagion in a Banking Network

Alan Morrison (), Michalis Vasios, Mungo Wilson and Filip Zikes
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Filip Zikes: https://www.federalreserve.gov/econres/filip-zikes.htm

No 2017-082, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We present the first micro-level evidence of the transmission of shocks through financial networks. Using the network of credit default swap (CDS) transactions between banks, we identify bank CDS returns attributable to counterparty losses. A bank's own CDS spread increases whenever counterparties from whom it has purchased default protection themselves experience losses. We find no such effect from losses of non-counterparties, nor from counterparties to whom the bank has sold protection. The effect on bank CDS returns through this counterparty loss channel is large relative to the direct effect on a bank's CDS returns from its own trading losses.

Keywords: Contagion; Counterparty risk; Credit default swaps; Networks (search for similar items in EconPapers)
JEL-codes: G21 G23 L14 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2017-08-15
New Economics Papers: this item is included in nep-ban and nep-net
References: Add references at CitEc
Citations: View citations in EconPapers (9)

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https://www.federalreserve.gov/econres/feds/files/2017082pap.pdf (application/pdf)

Related works:
Working Paper: Identifying contagion in a banking network (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-82

DOI: 10.17016/FEDS.2017.082

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