On the Computational Complexity of Measuring Global Stability of Banking Networks

Piotr Berman, Bhaskar DasGupta, Lakshmi Kaligounder, Marek Karpinski

    Research output: Contribution to journalArticle

    2 Citations (Scopus)

    Abstract

    Threats on the stability of a financial system may severely affect the functioning of the entire economy, and thus considerable emphasis is placed on the analyzing the cause and effect of such threats. The financial crisis in the current and past decade has shown that one important cause of instability in global markets is the so-called financial contagion, namely the spreadings of instabilities or failures of individual components of the network to other, perhaps healthier, components. This leads to a natural question of whether the regulatory authorities could have predicted and perhaps mitigated the current economic crisis by effective computations of some stability measure of the banking networks. Motivated by such observations, we consider the problem of defining and evaluating stabilities of both homogeneous and heterogeneous banking networks against propagation of synchronous idiosyncratic shocks given to a subset of banks. We formalize the homogeneous banking network model of Nier et al. (J. Econ. Dyn. Control 31:2033–2060, 2007) and its corresponding heterogeneous version, formalize the synchronous shock propagation procedures outlined in (Nier et al. J. Econ. Dyn. Control 31:2033–2060, 2007; M. Eboli Mimeo, 2004), define two appropriate stability measures and investigate the computational complexities of evaluating these measures for various network topologies and parameters of interest. Our results and proofs also shed some light on the properties of topologies and parameters of the network that may lead to higher or lower stabilities.

    Original languageEnglish (US)
    Pages (from-to)595-647
    Number of pages53
    JournalAlgorithmica
    Volume70
    Issue number4
    DOIs
    StatePublished - Oct 25 2014

    Fingerprint

    Banking
    Global Stability
    Computational complexity
    Computational Complexity
    Shock
    Propagation
    Contagion
    Financial Crisis
    Topology
    Network Topology
    Network Model
    Heterogeneous networks
    Entire
    Economics
    Subset

    All Science Journal Classification (ASJC) codes

    • Computer Science(all)
    • Computer Science Applications
    • Applied Mathematics

    Cite this

    Berman, Piotr ; DasGupta, Bhaskar ; Kaligounder, Lakshmi ; Karpinski, Marek. / On the Computational Complexity of Measuring Global Stability of Banking Networks. In: Algorithmica. 2014 ; Vol. 70, No. 4. pp. 595-647.
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    abstract = "Threats on the stability of a financial system may severely affect the functioning of the entire economy, and thus considerable emphasis is placed on the analyzing the cause and effect of such threats. The financial crisis in the current and past decade has shown that one important cause of instability in global markets is the so-called financial contagion, namely the spreadings of instabilities or failures of individual components of the network to other, perhaps healthier, components. This leads to a natural question of whether the regulatory authorities could have predicted and perhaps mitigated the current economic crisis by effective computations of some stability measure of the banking networks. Motivated by such observations, we consider the problem of defining and evaluating stabilities of both homogeneous and heterogeneous banking networks against propagation of synchronous idiosyncratic shocks given to a subset of banks. We formalize the homogeneous banking network model of Nier et al. (J. Econ. Dyn. Control 31:2033–2060, 2007) and its corresponding heterogeneous version, formalize the synchronous shock propagation procedures outlined in (Nier et al. J. Econ. Dyn. Control 31:2033–2060, 2007; M. Eboli Mimeo, 2004), define two appropriate stability measures and investigate the computational complexities of evaluating these measures for various network topologies and parameters of interest. Our results and proofs also shed some light on the properties of topologies and parameters of the network that may lead to higher or lower stabilities.",
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    Berman, P, DasGupta, B, Kaligounder, L & Karpinski, M 2014, 'On the Computational Complexity of Measuring Global Stability of Banking Networks', Algorithmica, vol. 70, no. 4, pp. 595-647. https://doi.org/10.1007/s00453-013-9769-0

    On the Computational Complexity of Measuring Global Stability of Banking Networks. / Berman, Piotr; DasGupta, Bhaskar; Kaligounder, Lakshmi; Karpinski, Marek.

    In: Algorithmica, Vol. 70, No. 4, 25.10.2014, p. 595-647.

    Research output: Contribution to journalArticle

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