Network Models of Financial Contagion: A Definition and Literature Review

Determining the risk of contagious failures due to credit exposures between organisations is a problem that has been the subject of a growing body of literature in recent years. The network model has become a commonly used tool, applied to both theoretical and empirical studies of financial contagion and systemic risk. The purpose of this paper is twofold. First, we propose a definition of the ‘Financial System Network’ which may be used to define the characteristics of any specific implementation of a network model in this field. Secondly, we evaluate the network models created by other researchers and compare and contrast various aspects of these implementations. We conclude by exploring avenues for future research in the area.