Efficient immunization strategies to prevent financial contagion.
Many immunization strategies have been proposed to prevent infectious viruses from spreading through a network. In this work, we study efficient immunization strategies to prevent a default contagion that might occur in a financial network. An essential difference from the previous studies on immunization strategy is that we take into account the possibility of serious side effects. Uniform immunization refers to a situation in which banks are "vaccinated" with a common low-risk asset. The riskiness of immunized banks will decrease significantly, but the level of systemic risk may increase due to the de-diversification effect. To overcome this side effect, we propose another immunization strategy, called counteractive immunization, which prevents pairs of banks from failing simultaneously. We find that counteractive immunization can efficiently reduce systemic risk without altering the riskiness of individual banks.
Graduate School of Economics, Kobe University, 2-1 Rokkodai, Nada, Kobe 657-8501, Japan.
Teruyoshi
T
Kobayashi
Graduate School of Economics, Kobe University, 2-1 Rokkodai, Nada, Kobe 657-8501, Japan.
Kohei
K
Hasui
D003198:Computer Simulation; D057172:Economic Recession; D005376:Financial Management; D006801:Humans; D018803:Models, Economic; D020414:Risk Sharing, Financial