Journal Of Network Theory In Finance

Risk.net

Reputation risk contagion

Peter Mitic

  • This paper assess the effects of changes in reputation in a group of 10 banks.
  • Influential nodes are identified as well as effects of reputational spreads and speed of convergence.
  • Agents in the network with a very positive reputation serve to mitigate the negative reputation of other agents in the network.

The effects of the reputation of any single member of a group of agents on all the others in the group are calculated by modeling the spread of reputation contagion in a DeGroot network. The reputation of individual agents is measured by compiling a reputation index for each agent over an extended period. Transition probabilities within the network are assessed by considering extreme reputational events using a Bayesian approach. The results indicate that consensus is reached quickly, and influential agents can be easily identified. Agents in the network with a very positive reputation serve to mitigate the negative reputation of other agents in the network. Approximately 10–15% of the reputation of any agent in the network is attributable to network effects; positive reputations are deflated and negative reputations are inflated. The network effect on the sales of any single agent can be estimated once the reputation score has been translated to sales.

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