The multiplex nature of global financial contagions
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(2020) 5:74
Applied Network Science
RESEARCH
Open Access
The multiplex nature of global financial contagions R. Maria del Rio-Chanona1,2 , Yevgeniya Korniyenko3 , Manasa Patnam3 and Mason A. Porter4* *Correspondence: [email protected] 4 Department of Mathematics, University of California Los Angeles, Los Angeles, CA, USA Full list of author information is available at the end of the article
Abstract As illustrated by the 2008 global financial crisis, the financial distress of one country can trigger financial distress in other countries. We examine the problem of identifying such “systemically important” countries (i.e., countries whose financial distress can trigger further distress), which is important for assessing global financial stability. Using data on bilateral financial positions that are split by asset type, we build a multiplex global financial network in which nodes represent countries, edges encode cross-country financial assets of various types, and layers represent asset types. We examine the temporal evolution of a measure of node importance known as MultiRank centrality, and we find that several major European countries decrease in rank and that several major Asian countries increase in rank since 2008. We then develop a multiplex threshold model of financial contagions in which a shock can propagate either within a layer or between layers. We find that the number of systemically important countries can be twice as large when we take into account the heterogeneity of financial exposures (i.e., when using a multiplex network) than in a contagion on an associated aggregate global financial network (i.e., on a monolayer network), as is often examined in other studies. We also study the extent to which buffers can reduce the propagation of financial distress. Our analysis suggests that accounting for both intralayer and interlayer propagation of contagions in a multiplex structure of financial assets is important for understanding interconnected financial systems of countries. Keywords: Financial contagions, Systemic risk, Multiplex networks
Introduction The 2008 global financial crisis illustrated interconnectedness in the financial stability of countries. In September 2008, Lehman Brothers Holdings Inc., one of the largest investment banks in the United States, went bankrupt. By October 2008, HBOS plc and Lloyds Banking Group were bailed out in the United Kingdom (Fernando et al. 2012; Tebogo 2012). Financial distress spread to other countries, and the crisis became global (De Haas and Van Horen 2012). Financial interconnectedness continues to be pervasive. Since the middle of the 1990s, there has been a rapid expansion of cross-border financial positions (i.e., in the balances of recorded assets, liabilities, and equity), with the stocks of foreign assets and foreign liabilities increasing from about 75–77% of the world’s © The Author(s). 2020 Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribut
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