Cascading failure in guarantee networks from the perspective of equilibrium

Abstract

PurposeThe purpose of this paper is to test the invulnerability of the guarantee network at the equilibrium point.Design/methodology/approachThis paper introduces a tractable guarantee network model that captures the invulnerability of the network in terms of cascade-based attack. Furthermore, the equilibrium points are introduced for banks to determine loan origination.FindingsThe proposed approach not only develops equilibrium analysis as an extended perspective in the guarantee network, but also applies cascading failure method to construct the guarantee network. The equilibrium points are examined by simulating experiment. The invulnerability of the guarantee network is quantified by the survival of firms in the simulating progress.Research limitations/implicationsThere is less study in equilibrium analysis of the guarantee network. Additionally, cascading failure model is expressed in the presented approach. Moreover, agent-based model can be extended in generating the guarantee network in the future study.Originality/valueThe approach of this paper presents a framework to analyze the equilibrium of the guarantee network. For this, the systemic risk of the whole guarantee network and each node's contribution are measured to predict the probability of default on cascading failure. Focusing on cascade failure process based on equilibrium point, the invulnerability of the guarantee network can be quantified.