Abstract
We investigate network entropy of dynamic banking systems, where interbank networks analyzed include random networks, small-world networks, and scale-free networks. We find that network entropy is positively correlated with the effect of systemic risk in the three kinds of interbank networks and that network entropy in the small-world network is the largest, followed by those in the random network and the scale-free network.
Highlights
There exist financial connections in the interbank market, which make it possible for the interbank market to be represented as a network
We find that network entropy is positively correlated with the effect of systemic risk in the three kinds of interbank networks and that network entropy in the small-world network is the largest, followed by those in the random network and the scale-free network
We can observe that network entropy is positively correlated with the effect of systemic risk in the three kinds of interbank networks
Summary
There exist financial connections in the interbank market, which make it possible for the interbank market to be represented as a network. It is important to study the financial connections in the interbank market from the network perspective. There is a rapidly growing literature on bank network models and systemic risk (e.g., [7,8,9,10,11,12,13,14,15,16,17,18,19]). According to the above literature, we can know that banking systems can be modeled as the complex networks, which are useful to investigate systemic risk. There is limited research to adopt entropy to investigate interbank networks and systemic risk. This paper aims to add to the current literature on understanding systemic risk in banking systems from the perspective of network entropy. Some studies show that the notion of entropy can be used to build an early warning indicator for systemic risk [24, 25]
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