# DebtRank: a microscopic foundation for shock propagation

The DebtRank algorithm was introduced to account for the build-up of distress in the markets, before the occurrence of defaults.

M. Bardoscia, S. Battiston, F. Caccioli, G. Caldarelli

The DebtRank algorithm has been increasingly investigated as a method to estimate the impact of shocks in financial networks, as it overcomes the limitations of the traditional default-cascade approaches. Here we formulate a dynamical “microscopic” theory of instability for financial networks by iterating balance sheet identities of individual banks and by assuming a simple rule for the transfer of shocks from borrowers to lenders. By doing so, we generalise the DebtRank formulation, both providing an interpretation of the effective dynamics in terms of basic accounting principles and preventing the underestimation of losses on certain network topologies. Depending on the structure of the interbank leverage matrix the dynamics is either stable, in which case the asymptotic state can be computed analytically, or unstable, meaning that at least one bank will default. We apply this frame- work to a dataset of the top listed European banks in the period 2008–2013. We find that network effects can generate an amplification of exogenous shocks of a factor ranging between three (in normal periods) and six (during the crisis) when we stress the system with a 0.5% shock on external (i.e. non-interbank) assets for all banks.

#### Network valuation in financial systems

P. Barucca, M. Bardoscia, F. Caccioli, M. D’Errico, G. Visentin, G. Caldarelli, S. Battiston

*Mathematical Finance*

#### The space of functions computed by deep layered machines

A. Mozeika, B. Li, D. Saad

Sub. to *Physical Review Letters*

#### Replica analysis of overfitting in generalized linear models

T. Coolen, M. Sheikh, A. Mozeika, F. Aguirre-Lopez, F. Antenucci

Sub. to *Journal of Physics A*

#### Degree-correlations in a bursting dynamic network model

F. Vanni, P. Barucca

*Journal of Economic Interaction and Coordination*

#### Phase transition creates the geometry of the continuum from discrete space

R. Farr, T. Fink

*Physical Review E*

124 / 124 papers