Finding communities in credit networks

Arbeitspapier

In this paper the authors focus on credit connections as a potential source of systemic risk. In particular, they seek to answer the following question: how do we find densely connected subsets of nodes within a credit network? The question is relevant for policy, since these subsets are likely to channel any shock affecting the network. As it turns out, a reliable answer can be obtained with the aid of complex network theory. In particular, the authors show how it is possible to take advantage of the community detection network literature. The proposed answer entails two subsequent steps. Firstly, the authors need to verify the hypothesis that the network under study truly has communities. Secondly, they need to devise a reliable algorithm to find those communities. In order to be sure that a given algorithm works, they need to test it over a sample of random benchmark networks with known communities. To overcome the limitation of existing benchmarks, the authors introduce a new model and test alternative algorithms, obtaining very good results with an adapted spectral decomposition method. To illustrate this method they provide a community description of the Japanese bank-firm credit network, getting evidence of a strengthening of communities over time and finding support for the well-known Japanese main bank system. Thus, the authors find comfort both from simulations and from real data on the possibility to apply community detection methods to credit markets. They believe that this method can fruitfully complement the study of contagious defaults, since the likelihood of intracommunity default contagion is expected to be high.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Economics Discussion Papers ; No. 2012-41

Classification and Topics

• Classification: Wirtschaft ; Econometric and Statistical Methods: Special Topics: Other ; Computational Techniques; Simulation Modeling ; Network Formation and Analysis: Theory ; Money Supply; Credit; Money Multipliers ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages
• Subject: Credit networks ; communities ; contagion ; systemic risk

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bargigli, Leonardo ; Gallegati, Mauro
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2012

Further information

• Handle: http://hdl.handle.net/10419/62119
• Last update: 10.03.2025, 11:41 AM CET