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

By Yevgeniya Korniyenko, Manasa Patnam, Rita Maria del Rio-Chanon, Mason A. Porter

May 15, 2018

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Yevgeniya Korniyenko, Manasa Patnam, Rita Maria del Rio-Chanon, and Mason A. Porter Evolution of the Global Financial Network and Contagion: A New Approach, (USA: International Monetary Fund, 2018) accessed December 5, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper studies the interconnectedness of the global financial system and its susceptibility to shocks. A novel multilayer network framework is applied to link debt and equity exposures across countries. Use of this approach—that examines simultaneously multiple channels of transmission and their important higher order effects—shows that ignoring the heterogeneity of financial exposures, and simply aggregating all claims, as often done in other studies, can underestimate the extent and effects of financial contagion.The structure of the global financial network has changed since the global financial crisis, impacted by European bank’s deleveraging and higher corporate debt issuance. Still, we find that the structure of the system and contagion remain similar in that network is highly susceptible to shocks from central countries and those with large financial systems (e.g., the USA and the UK). While, individual European countries (excluding the UK) have relatively low impact on shock 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.

Subject: Balance of payments, Banking, Commercial banks, Financial contagion, Financial institutions, Financial sector policy and analysis, Foreign direct investment, Portfolio investment, Stocks

Keywords: Bank funding, Commercial banks, Equity, Europe, FDI equity, FDI-equity layer, Financial contagion, Foreign direct investment, Global, Network analysis, PageRank centrality measure, Portfolio investment, Spillovers, Stocks, UK shock, USA banking shock, WP

Publication Details

Pages:

41
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/113
Stock No:

WPIEA2018113
ISBN:

9781484353240
ISSN:

1018-5941

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