Understanding Financial Contagion: A Complexity Modeling Perspective

Abstract

This chapter reviews key contributions of complexity science to the study of systemic risk in financial systems. The focus is on network models of financial contagion, where I explore various mechanisms of shock propagation, such as counterparty default risk and overlapping portfolios. I highlight how the interconnectedness of financial institutions can amplify risk, and I discuss how standard risk management tools, which neglect these interactions, can increase systemic risk.

25 pages, 4 figures. This article will be a contributed chapter to the SFI edited volume: The Economy as a Complex Evolving System, Part IV