Evolution of the Global Financial Network and Contagion: A New Approach
42 Pages Posted: 1 Aug 2018
Date Written: May 2018
This paper studies the interconnectedness of the global financial system and its susceptibilityto shocks. A novel multilayer network framework is applied to link debt and equityexposures across countries. Use of this approach-that examines simultaneously multiplechannels of transmission and their important higher order effects-shows that ignoring theheterogeneity of financial exposures, and simply aggregating all claims, as often done inother studies, can underestimate the extent and effects of financial contagion.The structure ofthe global financial network has changed since the global financial crisis, impacted byEuropean bank's deleveraging and higher corporate debt issuance. Still, we find that thestructure of the system and contagion remain similar in that network is highly susceptible toshocks from central countries and those with large financial systems (e.g., the USA and theUK). While, individual European countries (excluding the UK) have relatively low impact onshock propagation, the network is highly susceptible to the shocks from the entire euro area.Another important development is the rising role of the Asian countries and the noticeable increase in network susceptibility to shocks from China and Hong Kong SAR economies.
Keywords: Financial systems, International financial markets, Financial contagion, External shocks, Spillovers, Globalization, network analysis, Neural Networks and Related Topics, International Lending and Debt Problems, International Policy Coordination and Transmission, Globalization: Finance
JEL Classification: C45, F34, F42, F65, G15
Suggested Citation: Suggested Citation