Credit Risk Contagion Model Based on Financial Industry Clusters

Financial industry clusters have been a new trend in modern economic development, and also provide potential channels for risk contagion among the financial system. The current credit risk contagion models mainly study the impact of the interconnectedness of the whole network on risk contagion, still lack consideration of the local risk exposures' characteristics under the impact of financial industry clusters. In view of this, we propose a credit risk contagion model based on financial industry clusters and analyze a scale-free financial network according to institution balance sheet. We detect financial industry clusters by identifying systemically important financial institutions. And by calculating the default probability of the institution in clusters, we propose a 'cluster contagion index' to assess the impact of local risk exposures on contagion. We verify the rationality of the model by comparing the default extent after the risk contagion under different network scales and different initial shocking scopes. The results of our model also highlight the impact that heterogeneous connectivity in clusters to magnify shocks, which will be significant for financial market regulators.