Evolution of the Global Financial Network and Contagion: A New Approach

42 Pages Posted: 1 Aug 2018

See all articles by Yevgeniya Korniyenko

Yevgeniya Korniyenko

International Monetary Fund (IMF)

Manasa Patnam

International Monetary Fund (IMF)

Mason Porter

University of California, Los Angeles (UCLA)

Rita Maria del Rio-Chanon

University of Oxford

Date Written: May 2018

Abstract

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

Korniyenko, Yevgeniya and Patnam, Manasa and Porter, Mason and del Rio-Chanon, Rita Maria, Evolution of the Global Financial Network and Contagion: A New Approach (May 2018). IMF Working Paper No. 18/113, Available at SSRN: https://ssrn.com/abstract=3221170

Yevgeniya Korniyenko (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Manasa Patnam

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Mason Porter

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

Rita Maria Del Rio-Chanon

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

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