title: Forest-fire model as a supercritical dynamic model in financial systems.
abstract: Recently large-scale cascading failures in complex systems have garnered substantial attention. Such extreme events have been treated as an integral part of self-organized criticality (SOC). Recent empirical work has suggested that some extreme events systematically deviate from the SOC paradigm, requiring a different theoretical framework. We shed additional theoretical light on this possibility by studying financial crisis. We build our model of financial crisis on the well-known forest fire model in scale-free networks. Our analysis shows a nontrivial scaling feature indicating supercritical behavior, which is independent of system size. Extreme events in the supercritical state result from bursting of a fat bubble, seeds of which are sown by a protracted period of a benign financial environment with few shocks. Our findings suggest that policymakers can control the magnitude of financial meltdowns by keeping the economy operating within reasonable duration of a benign environment.
authors.affiliation: Center for Complex Systems Studies and CTP, Department of Physics and Astronomy, Seoul National University, Seoul 151-747, Korea.
authors.forename: Deokjae
authors.initials: D
authors.lastname: Lee
authors.affiliation: Department of Economics, Seoul National University, Seoul 151-747, Korea.
authors.forename: Jae-Young
authors.initials: JY
authors.lastname: Kim
authors.affiliation: Graduate School of Business, Seoul National University, Seoul 151-747, Korea.
authors.forename: Jeho
authors.initials: J
authors.lastname: Lee
authors.affiliation: Center for Complex Systems Studies and CTP, Department of Physics and Astronomy, Seoul National University, Seoul 151-747, Korea.
authors.forename: B
authors.initials: B
authors.lastname: Kahng