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Handbook on Systemic Risk by Joseph A. Langsam, Jean-Pierre Fouque

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18

Financial Crisis and Contagion: A Dynamical Systems Approach

Youngna Choi and Raphael Douady

Abstract We use a multi-agent-based model to investigate and analyze financial crises where agents are large aggregates of the economic system under consideration. We analyze financial crises as the breakage of a dynamic financial equilibrium. We suggest that when the equilibrium is stable, a small perturbation is absorbed by the market. On the other hand, when the market becomes unstable, perturbations propagate and amplify through the system, and contagion and systemic risk occur, resulting in a global financial crisis.

The market instability indicator is the spectral radius of the Jacobian matrix of a dynamical system driving the evolution of the ...

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