Network Model of Inter-firm Financial Contagion and Risk Assessment of Regional Industrial Cluster

Abstract

Financial contagion is tightly link to systematic stability of inter-firm network. Traditional methods and models are not very applicable to assess risk of financial contagion when complex network is involved. In this paper, authors propose a network model for inter-firm financial contagion, and suggest a risk assessment framework for regional industrial cluster that is a typical inter-firm network. Based on the network model, destruction loss of financial contagion can be estimated in the background of complex network. Robustness and fragility are two aspects stressed in risk assessment framework, in which the network model of contagion is used. A realistic example, Shaoxing industrial cluster from China, is assessed employing the network model and risk assessment framework. Results show the network model and risk assessment framework is fit to management practices. Therefore, our network model and risk assessment framework provides a new way for evaluating the risk of inter-firm financial contagion.