Cascading failures in the global financial system: A dynamical model

Abstract

In this paper, we propose a dynamical model to capture cascading failures among interconnected organizations in the global financial system and develop a framework to investigate under which conditions organizations remain healthy. The contribution of this paper is threefold: i) we develop a dynamical model that describes the time evolution of the organizations' equity values given nonequilibrium initial conditions; ii) we characterize the equilibria for this model; and iii) we provide a computational method to anticipate potential propagation of failures.