Mitigating cascades in sandpile models: an immunization strategy for systemic risk?

A. Scala, V. Zlatić, G. Caldarelli, G. D’Agostino

Journal de Physique IV 225, 2017 (2016)

#cascadingfailure#financialnetworks#finance

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Cascades on a random graph

We use a simple model of distress propagation (the sandpile model) to show how financial systems are naturally subject to the risk of systemic failures. Taking into account possible network structures among financial institutions, we investigate if simple policies can limit financial distress propagation to avoid system-wide crises, i.e. to dampen systemic risk. We therefore compare different immunization policies (i.e. targeted helps to financial institutions) and find that the information coming from the network topology allows to mitigate systemic cascades by targeting just few institutions.