Modeling and Simulation of Financial Contagion Based on Correlated Assets Portfolio

Authors

Fan Hong, Glorious Sun School of Business and Management, Donghua University, Shanghai 200051, China;
Chunyao Liu, Glorious Sun School of Business and Management, Donghua University, Shanghai 200051, China;

Abstract

Abstract: The correlation of assets portfolio in financial institutions is an important cause of indirect financial contagion, but the modeling of this problem has not been studied yet. Considering the correlation between the assets invested by financial institutions, a dynamic evolution model and the simulation algorithm of financial network system based on correlated assets portfolio are constructed; and the impact of assets portfolio correlation, degree of assets diversity and market density (the ratio of financial institutions to assets) on financial contagion are studied. Simulation results show that the positive correlation between assets portfolio exacerbates financial contagion, while the negative correlation buffers and counteracts the impact. When the degree of assets diversity increases, the probability of contagion increases first and then decreases gradually. The probability of contagion is maximum when the market density is 1 (the number of financial institutions is equal to the number of assets). These results provide the basis of decision making for financial regulators.

Recommended Citation

Hong, Fan and Liu, Chunyao (2019) "Modeling and Simulation of Financial Contagion Based on Correlated Assets Portfolio," Journal of System Simulation: Vol. 31: Iss. 6, Article 5.
DOI: 10.16182/j.issn1004731x.joss.17-0195
Available at: https://dc-china-simulation.researchcommons.org/journal/vol31/iss6/5

First Page

1062

Revised Date

2017-06-30

DOI Link

https://doi.org/10.16182/j.issn1004731x.joss.17-0195

Last Page

1070

CLC

TP391.9

Recommended Citation

Fan Hong, Liu Chunyao. Modeling and Simulation of Financial Contagion Based on Correlated Assets Portfolio[J]. Journal of System Simulation, 2019, 31(6): 1062-1070.

DOI

10.16182/j.issn1004731x.joss.17-0195