Dynamical Macro-Prudential Stress Testing Using Network Theory

45 Pages Posted: 19 Aug 2014 Last revised: 25 Sep 2014

See all articles by Sary Levy Carciente

Sary Levy Carciente

Boston University; Academia Nacional de Ciencias Economicas; Universidad Central de Venezuela

Dror Y. Kenett

Financial Industry Regulatory Authority (FINRA); Johns Hopkins University

Adam Avakian

Boston University

H. Eugene Stanley

Boston University - Center for Polymer Studies

Shlomo Havlin

Bar Ilan University

Date Written: August 18, 2014

Abstract

The increasing frequency and scope of financial crises has made global financial stability one of the major concerns of economic policy and decision makers. Under this highly complex environment, financial and banking supervision has to be thought as a systemic task, focusing not only on the strength of the institutions but also on the interdependent relations among them, unraveling the structure and dynamic of the system under surveillance. Using network theory, we developed a dynamic model to reveal the systemic structure of a banking system, to analyze its sensibility to external shocks and to evaluate the presence of contagious underlying features of the system. As a case study, we make use of the Venezuelan banking system in the period of 1998-2013. The introduced model was able to capture, in a dynamic way, changes in the structure of the system and the sensibility of banks portfolio to external shocks. Results suggest the fruitfulness of this kind of approach to policy makers and supervision agencies to address macro-prudential dynamical stress testing and regulation.

Keywords: Financial Networks, Interdependence, Contagion, Banking System, Venezuela, Macro-prudential

JEL Classification: G21, D85, N26, G18

Suggested Citation

Levy Carciente, Sary and Kenett, Dror Y. and Avakian, Adam and Stanley, H. Eugene and Havlin, Shlomo, Dynamical Macro-Prudential Stress Testing Using Network Theory (August 18, 2014). Available at SSRN: https://ssrn.com/abstract=2482742 or http://dx.doi.org/10.2139/ssrn.2482742

Sary Levy Carciente

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Academia Nacional de Ciencias Economicas ( email )

Palacio de las Academias
Caracas, DC 1010
Venezuela

Universidad Central de Venezuela ( email )

University City
Los Chaguaramos
Caracas, 1050
Venezuela

HOME PAGE: http://www.sarylevy.com

Dror Y. Kenett (Contact Author)

Financial Industry Regulatory Authority (FINRA) ( email )

Washington, DC
United States

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

Adam Avakian

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

H. Eugene Stanley

Boston University - Center for Polymer Studies ( email )

Boston, MA 02215
United States

Shlomo Havlin

Bar Ilan University ( email )

Ramat Gan
Ramat Gan, 52900
Israel

HOME PAGE: http://havlin.biu.ac.il/

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