Contagion in financial systems: a Bayesian network approach.

*(English)*Zbl 1408.91245Summary: 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 |

##### Keywords:

Bayesian network; financial contagion; measure of systemic risk; multivariate default risk; probability of default; structural default risk model; systemic risk##### Software:

BNT##### References:

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