An evolving network model of credit risk contagion in the financial market

Abstract

This paper introduces an evolving network model of credit risk contagion containing the average fitness of credit risk contagion, the risk aversion sentiments, and the ability of resist risk of credit risk holders. We discuss the effects of the aforementioned factors on credit risk contagion in the financial market through a series of theoretical analysis and numerical simulations. We find that, on one hand, the infected path distribution of the network gradually increases with the increase in the average fitness of credit risk contagion and the risk aversion sentiments of nodes, but gradually decreases with the increase in the ability to resist risk of nodes. On the other hand, the average fitness of credit risk contagion and the risk aversion sentiments of nodes increase the average clustering coefficient of nodes, whereas the ability to resist risk of nodes decreases this coefficient. Moreover, network size also decreases the average clustering coefficient.

Keywords:

• credit risk contagion
• preferential node deletion
• behavioral factors
• evolving network model

JEL Classification:

• A12
• C15
• C80
• E22
• E44
• G32

Additional information

Notes on contributors

Tingqiang Chen

Tingqiang CHEN. Doctor, Assistant Professor at School of Economics and Management in Nanjing Technology University. And postdoctor at School of Management and Engineering in Nanjing University. Author and co-author of more than 40 scientific articles. Research interests: financial risk management, investment and financing decision-making and analysis, behavioral finance, game theory, the complexity of financial analysis.

Jianmin He

Jianmin HE. Professor at School of Economics and Management in Southeast University. Author and co-author of more than 300 scientific articles and 2 books. Research interests: financial engineering, investment and financing decision-making, the complexity of financial analysis.

Xindan Li

Xindan LI. Doctor, Professor at School of Management and Engineering in Nanjing University. Author and co-author of more than 150 scientific articles and 7 books. Research interests: financial market management, investment and financing decision-making, behavioral finance.