Irena Vodenska Published in Nature’s Scientific Reports

in Administrative Sciences, Faculty News, Irena Vodenska, MET News
February 28th, 2013

Irena Vodenska

MET Administrative Sciences professor Irena Vodenska has published a paper, entitled “Cascading Failures in Bi-partite Graphs: Model for Systemic Risk Propagation.” The full-text of the paper can be accessed for free in Nature’s Scientific Reports, an online, open-access research publication.

Abstract:

As economic entities become increasingly interconnected, a shock in a financial network can provoke significant cascading failures throughout the system. To study the systemic risk of financial systems, we create a bi-partite banking network model composed of banks and bank assets and propose a cascading failure model to describe the risk propagation process during crises. We empirically test the model with 2007 US commercial banks’ balance sheet data and compare the model prediction of the failed banks with the real failed banks after 2007. We find that our model efficiently identifies a significant portion of the actual failed banks reported by Federal Deposit Insurance Corporation. The results suggest that this model could be useful for systemic risk stress testing for financial systems. The model also identifies that commercial rather than residential real estate assets are major culprits for the failure of over 350 US commercial banks during 2008–2011.