Research And Application Of Stress Testing Based On Network Theory

In the 21 st century,contacts of economic and finance in the world become increasingly closer day by day.The relationships between financial institutions are either more inseparable.On the one hand,it is beneficial to diversify risk and improve the efficiency of financial system.On the other hand,it also enhances the probability of infection effect of financial system and is not conducive to the stability of the system.Thus strengthening the supervision on the financial system,especially the banking system,has become a very important issue nowadays.In order to measure the stability of the banking system,the basic method is the stress test.But the traditional stress test is usually carried out in different departments,only concerned about their own products and risks.So it cannot objectively reflect the whole system.At the same time,the traditional method has some limitations in the measurement of cross-infection.It is difficult to analyze details of the system.In order to overcome the shortcomings of traditional methods,the academia have proposed some new methods to examine the stability of the system: network approach,co-risk model,and default intensity model.This article also explains the three methods in details,and compares them as well.In order to obtain a better method to assess the stability of the financial system,we overcome the shortcomings of the network approach and then construct a dynamical bipartite network model for banks and assets of banking system of China in 2016.In this paper,we initiate a shock to each of the 7 asset classes and simulate the resulting aftershocks across the banking system.We calculate the rate of survival of the system and analyze the results from four perspectives: shock level and contagion effect,asset size versus surviving banks,contagion sensitivity,and non-surviving banks versus solvency index.We found that the asset-structure of the banking system will have a certain impact on systemic risk.Meanwhile,there is also a certain relationship between non-surviving banks and its own balance sheets.Of course,there are some shortcomings in this paper.But it can be applied as a new method of the stress test.