Contagion in Chinese Banking System: A Comparison of Maximum Entropy Method and Transfer Entropy Method

Published on Jul 1, 2014 in CSO (Computational Sciences and Optimization)
· DOI :10.1109/CSO.2014.136
Changzhi Liang5
Estimated H-index: 5
(CAS: Chinese Academy of Sciences),
Xiaoqian Zhu7
Estimated H-index: 7
(CAS: Chinese Academy of Sciences)
+ 1 AuthorsJianping LiXiaolei19
Estimated H-index: 19
Maximum entropy method (MEM) is the traditional approach to estimate interbank exposure matrix, which is the key to assess contagion effect in banking system. Recently, a new transfer entropy method (TEM) is proposed to estimate interbank exposure matrix. This paper employs the two approaches to estimate interbank exposure matrix of Chinese banking system, and then simulate the contagion process given the initial failure of a bank in the system. The comparison of the results indicate that MEM is consistent with TEM when it comes to general and qualitative features of Chinese banking system; while the differences begin to emerge when it comes to the exact and quantitative features of Chinese banking system.
  • References (15)
  • Citations (1)
Published on Sep 1, 2014in Quantitative Finance1.36
Angelika Sachs4
Estimated H-index: 4
(LMU: Ludwig Maximilian University of Munich)
This paper assesses the impact of a certain structure of interbank exposures on the stability of a stylized financial system. Given a certain balance sheet structure of financial institutions, a large number of valid matrices of interbank exposures is created by a random generator. Assuming a certain loss given default, domino effects are simulated. The main results are, first, that financial stability depends not only on the completeness and interconnectedness of the network but also on the dis...
Published on Apr 1, 2014in Journal of Banking and Finance2.21
Chunping Liu2
Estimated H-index: 2
(NTU: Nottingham Trent University),
Patrick Minford19
Estimated H-index: 19
(Cardiff University)
We examine whether by adding a credit channel to the standard New Keynesian model we can account better for the behaviour of US macroeconomic data up to and including the banking crisis. We use the method of indirect inference which evaluates statistically how far a model's simulated behaviour mimics the behaviour of the data. We find that the model with credit dominates the standard model by a substantial margin. Credit shocks are the main contributor to the variation in the output gap during t...
Published on Dec 16, 2013in Entropy2.42
Jianping LiXiaolei19
Estimated H-index: 19
Changzhi Liang5
Estimated H-index: 5
(USTC: University of Science and Technology of China)
+ 2 AuthorsDengsheng Wu10
Estimated H-index: 10
(CAS: Chinese Academy of Sciences)
What is the impact of a bank failure on the whole banking industry? To resolve this issue, the paper develops a transfer entropy-based method to determine the interbank exposure matrix between banks. This method constructs the interbank market structure by calculating the transfer entropy matrix using bank stock price sequences. This paper also evaluates the stability of Chinese banking system by simulating the risk contagion process. This paper contributes to the literature on interbank contagi...
Published on Jan 1, 2013in Journal of Economic Behavior and Organization1.40
Kartik Anand10
Estimated H-index: 10
(Technical University of Berlin),
Prasanna Gai9
Estimated H-index: 9
(University of Auckland)
+ 2 AuthorsMatthew Willison5
Estimated H-index: 5
(Bank of England)
We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a stylised financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents - domestic banks, overseas banks, and firms. Calibrating the model to advanced country banking sector data, this preliminary model generates broadly sensible aggregate loss distributions which are bimodal in...
Published on Aug 1, 2012in Journal of Economic Behavior and Organization1.40
Andreas Krause7
Estimated H-index: 7
(University of Bath),
Simone Giansante7
Estimated H-index: 7
(University of Bath)
We model a stylized banking system where banks are characterized by the amount of capital, cash reserves and their exposure to the interbank loan market as borrowers as well as lenders. A network of interbank lending is established that is used as a transmission mechanism for the failure of banks through the system. We trigger a potential banking crisis by exogenously failing a bank and investigate the spread of this failure within the banking system. We find the obvious result that the size of ...
Published on Jul 1, 2011in Journal of Monetary Economics2.44
Prasanna Gai7
Estimated H-index: 7
(University of Auckland),
Andrew G. Haldane24
Estimated H-index: 24
(Bank of England),
Sujit Kapadia13
Estimated H-index: 13
(Bank of England)
This paper develops a network model of interbank lending in which unsecured claims, repo activity and shocks to the haircuts applied to collateral assume centre stage. We show how systemic liquidity crises of the kind associated with the interbank market collapse of 2007–2008 can arise within such a framework, with funding contagion spreading widely through the web of interlinkages. Our model illustrates how greater complexity and concentration in the financial network may amplify this fragility...
Published on May 1, 2011in Journal of Banking and Finance2.21
Paolo Emilio Mistrulli12
Estimated H-index: 12
Interbank markets allow banks to cope with specific liquidity shocks. At the same time, they may be a channel allowing a bank default to spread to other banks. This paper analyzes how contagion propagates within the Italian interbank market using a unique data set including actual bilateral exposures. Since information on bilateral exposures was not available in most previous studies, they assumed that banks spread their lending as evenly as possible among all the other banks by maximizing the e...
Published on Apr 1, 2013in Journal of Financial Stability2.30
Christoph Memmel13
Estimated H-index: 13
(BBk: Deutsche Bundesbank),
Angelika Sachs4
Estimated H-index: 4
Carrying out interbank contagion simulations for the German banking sector for the period from the first quarter of 2008 to the second quarter of 2011, we obtain the following results: (i) The system becomes less vulnerable to direct interbank contagion over time. (ii) The loss distribution for each point in time can be condensed into one indicator, the expected number of failures, without much loss of information. (iii) Important determinants of this indicator are the banks' capital, their inte...
Published on Jul 1, 2004in International Journal of Central Banking0.79
Iman van Lelyveld17
Estimated H-index: 17
(De Nederlandsche Bank),
Franka R. Liedorp5
Estimated H-index: 5
(De Nederlandsche Bank)
We investigate interlinkages and contagion risks in the Dutch interbank market. Based on several data sources, including the answers of banks to a questionnaire, we estimate the exposures in the interbank market at bank level. Next, we perform a scenario analysis to measure contagion risks. We find that the bankruptcy of one of the large banks will put a considerable burden on the other banks, but will not lead to a complete collapse of the interbank market. The contagion effects of the failure ...
Published on Jul 10, 2000in Physical Review Letters9.23
Thomas Schreiber35
Estimated H-index: 35
(MPG: Max Planck Society)
An information theoretic measure is derived that quantifies the statistical coherence between systems evolving in time. The standard time delayed mutual information fails to distinguish information that is actually exchanged from shared information due to common history and input signals. In our new approach, these influences are excluded by appropriate conditioning of transition probabilities. The resulting transfer entropy is able to distinguish effectively driving and responding elements and ...
Cited By1
Published on Jan 1, 2017in Journal of Neuroscience Methods2.79
Teng Ma6
Estimated H-index: 6
(University of Electronic Science and Technology of China),
Hui Li3
Estimated H-index: 3
(University of Electronic Science and Technology of China)
+ 5 AuthorsPeng Xu35
Estimated H-index: 35
(University of Electronic Science and Technology of China)
Abstract Background Motion-onset visual evoked potentials (mVEP) can provide a softer stimulus with reduced fatigue, and it has potential applications for brain computer interface(BCI)systems. However, the mVEP waveform is seriously masked in the strong background EEG activities, and an effective approach is needed to extract the corresponding mVEP features to perform task recognition for BCI control. New method In the current study, we combine deep learning with compressed sensing to mine discr...