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Contagion in financial systems: a Bayesian network approach. (English) Zbl 1408.91245
Summary: We develop a structural default model for interconnected financial institutions in a probabilistic framework. For all possible network structures we characterize the joint default distribution of the system using Bayesian network methodologies. Particular emphasis is given to the treatment and consequences of cyclic financial linkages. We further demonstrate how Bayesian network theory can be applied to detect contagion channels within the financial network, to measure the systemic importance of selected entities on others, and to compute conditional or unconditional probabilities of default for single or multiple institutions.
Reviewer: Reviewer (Berlin)

MSC:
91G99 Actuarial science and mathematical finance
90B15 Stochastic network models in operations research
62F15 Bayesian inference
05C90 Applications of graph theory
Software:
BNT
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