Dynamical macroprudential stress testing using network theory

Sary Levy-Carciente, Dror Y. Kenett, Adam Avakian, H. Eugene Stanley, Shlomo Havlin

Research output: Contribution to journalArticlepeer-review

54 Scopus citations


The increasing frequency and scope of financial crises have made global financial stability one of the major concerns of economic policy and decision makers. This has led to the understanding that financial and banking supervision has to be thought of as a systemic task, focusing on the interdependent relations among the institutions. Using network theory, we develop a dynamic model that uses a bipartite network of banks and their assets to analyze the system's sensitivity to external shocks in individual asset classes and to evaluate the presence of features underlying the system that could lead to contagion. As a case study, we apply the model to stress test the Venezuelan banking system from 1998 to 2013. The introduced model was able to capture monthly changes in the structure of the system and the sensitivity of bank portfolios to different external shock scenarios and to identify systemic vulnerabilities and their time evolution. The model provides new tools for policy makers and supervision agencies to use for macroprudential dynamical stress testing.

Original languageEnglish
Pages (from-to)164-181
Number of pages18
JournalJournal of Banking and Finance
StatePublished - 1 Oct 2015

Bibliographical note

Funding Information:
We thank Ruth Krivoy (Former President of the Central Bank of Venezuela), Fernando Ferrari Filho (UFRGS, Brazil), Rebecca McCaughrin, Greg Feldberg, Paul Glasserman, Greg Duffee, and Jorge Chan-Lau for their comments and feedback on this work. We thank SUDEBAN for providing statistical historical data of the Venezuelan banking system. We thank Xuqing Huang and Irena Vodenska for providing code that served as the basis for our model and its schematic graphic shown in Fig. 1 . SLC gratefully acknowledges the financial support of the Fulbright Program for visiting scholars. AA, DYK, HES and SH acknowledge financial support from DTRA and ONR.

Publisher Copyright:
© 2015.


  • Banking system
  • Contagion
  • Financial networks
  • Interdependence
  • Macroprudential
  • Venezuela


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