Financial Networks

Alexander Denev

In this chapter we give applications of PGMs to the study of networks of firms and network phenomena, such as default contagion, that could arise in single-period and multi-period settings.

The study of financial networks is not new; nor is the awareness of its importance. In late 2009 the European Central Bank (ECB) hosted a workshop called “Recent advances in modelling systemic risk using network analysis” (see European Central Bank 2010), which gathered practitioners and academics from around the world to share and discuss advances in network theory. The organisation of such a discussion at that time could be seen as a little retroactive, given that the contagion started by a few defaulted systemically important financial institutions (SIFIs) had already spread. The importance of the discussion was not to acknowledge that the world is vastly interconnected (this was a well-known fact) but rather to attract attention towards the need for a more systematic investigative approach to the properties and sources of instabilities that such interconnectedness can entail. The following summarises the new attitude very well:

policy makers are currently not only refining the