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.
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