Description

Although the financial systems of advanced count ries have weathered numerous shocks in recent years, the events triggered by the sub-prime cr isis of August 2007 have been “super-systemic” in scope, enveloping financial institu tions across the major economies as well as far away Iceland and New Zealand. In this paper, we apply network techniques to develop a framework for analyzing financial contagion that isolate the probability of contagion from its potential spread. Our results suggest that complex financial systems may be robust-yet-fragile in nature. Under plausible assumptions, the greater connectivity implied by new financial instruments (e.g., credit derivatives) reduces the likelihood of contagion. But the impa ct on the financial system, in the event of problems, can be on a significantly larger scale than before.