• CDS
• Contagion
• Extreme Value Theory
• Financial Econometrics
• Financial Networks
• Financial Stability
• Systemic Risk

This dissertation contains two papers about systemic risk and interconnectedness.

In Part I we present a simulation model of contagion in interbank networks. We find that the frequency of contagion is non-monotonic in connectivity. We also explore the role of heterogeneity, finding how it interacts with connectivity in affecting contagion risk. In general, high levels of heterogeneity seem to widen the interval of connectivity levels in which contagion is possible. Heterogeneity has, in general, stabilizing effects under the hypothesis of random shocks, while it is detrimental when shocks are targeted to the most relevant institutions. We also find that too-connected-to-fail banks pose higher contagion risk than too-big-to-fail banks. We then put forward a complete interbank model which includes a short-term and a long-term market. Banks also engage in asset-liability management to satisfy capital requirements. We find that the objectives of a micro-prudential and a macro-prudential regulation may be misaligned when banks interact in a complex system. Balance sheet composition, fire-sale losses and capital requirements interact in complex ways in determining the probability of contagion.

In Part II we develop a theoretical model of systemic risk defining it as the risk generated by and within the financial system. The model highlights how systemic risk is a network externality stemming from the dependence structure chosen by institutions in a decentralized equilibrium. Systemic risk can be offset by a stabilization policy which can be optimally funded by a tax based on institutions' centrality. We find that the intensity of the stabilization policy is linked to the leading eigenvalue of the financial network, which then becomes a measure of systemic risk. A t-copula model is then used to estimate the tail dependence (TailDep) network through which we are able to track the evolution of systemic risk and to quantify the systemic importance of financial institutions in the recent years.