A discrete dynamics approach to interbank financial contagion

Abstract

Abstract The purpose of this paper is to describe in terms of mathematical models and systems theory the dynamics of interbank financial contagion. Such a description gives rise to a model that can be studied with mathematical tools and will provide a new framework for the study of contagion dynamics complementary to research by simulation studied so far. It provides a better understanding of such financial networks and a unifying network for the research of financial contagion. The mathematical description we present is in terms of Boolean dynamical systems and a linear operator. We relate the properties of the dynamical systems to the properties of the operator.