On The Contagion Of Risks Under The Condition Of Holding Common Assets Based On The Perspective Of Random Networks

Links between different countries has become much closer with the deepening development of global economic and finance. Financial crisis are showing growing infections and to the scope infected by financial crisis has become larger and damages caused by financial crisis become more serious. The global financial crisis caused by US subprime crisis in the year of 2007 infected to the world's major economies at an unexpectedly rapid rate. In 2013 the event of bank money shortage in the fast conduction between financial markets made people begin to think about systemic risk and contagion of financial crisis.Many scholars delve into the causes of the financial crisis and its infection mechanism from different perspectives in order to guard against financial crisis effectively, making great contributions to prevention of financial crises. However, the 2007 US subprime mortgage crisis triggered a global financial crisis, making the conventional economics being questioned of its correctness on risk analysis and risk regulatory. Some scholars proposed to analyze financial crisis from the perspective of systemic risk. Thus, connectivity between different financial elements in the financial system is considered a close relationship with the stability of financial system.The contagion of risks is studied under the perspective that financial institutions hold common assets which suffer an unexpected shock resulting in the bankrupt of certain financial institutions. Firstly, the definition of systemic risk was introduced herein this paper; secondly, the causes of systemic risk were discussed; thirdly, the situation was stress in which the price of certain asset held by a financial institution reduced because of external shocks. Then the price fal ing-down may lead to the liquidation of that intuition and then price of the same asset held by other intuitions also suffers. Thus a chain liquidation may break out in the whole banking system, thus the whole financial system.This paper represents the assets held by institutions with a random network and simulates the effects of different parameters on the probability of systemic risk. Results indicate that: 1) the more financial institutions there are, namely the closer financial institutions are linked to each other, the more probability of a global cascade and systemic risk happening; 2) the more assets there are, the less probability of a global cascade happening, which is a key driver for that financial institutions to hold more diverse portfolio; 3) the average number of assets held by different institutions has a nonlinear effect on the systemic risk; 4) as for the asset structure of institutions, which means the proportion of risk-free assets and risky assets, when institutions invest more in risky assets, the systemic risk becomes higher. Besides, higher leverage leads to higher systemic risk.