Systemic risk and macroeconomic fat tails

Bougheas, Spiros, Harvey, David and Kirman, Alan (2018) Systemic risk and macroeconomic fat tails. In: The economy as a complex spatial system. Springer proceedings in complexity . Springer, Cham, pp. 119-136. ISBN 978-3-319-65627-4

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We propose a mechanism for shock amplification that potentially can account for fat tails in the distribution of the growth rate of national output. We argue that extreme macroeconomic events, such as the Great Depression and the Great Recession, were preceded by significant turmoil in the banking system. We have developed a model of bank network formation and presented numerical simulations that show that, for the benchmark case, aggregate credit follows a random walk. When we introduce fire sales the model does not only produce larger variations in the growth of aggregate credit but also shows that there is an asymmetry between booms and busts that is also consistent with empirical evidence.

Item Type: Book Section
Keywords: Systemic risk; Banking system; Aggregate risk; Financial network; Fat tails
Schools/Departments: University of Nottingham, UK > Faculty of Social Sciences > School of Economics
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Depositing User: Eprints, Support
Date Deposited: 20 Sep 2017 08:26
Last Modified: 19 Jan 2018 04:43

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