Financial Contagion in Cross-holdings Networks: The Case of Ecuador

Abstract

Financial contagion refers to the propagation of shocks that can generate widespread failures. The authors apply a financial contagion model proposed by Elliott, Golub, and Jackson (2014) to a cross-shareholding network of firms in Ecuador. The authors use a novel dataset to study the potential channels for contagion. Although diversification is not high, results reveal enough conditions for a contagion event to occur. However, the low level of integration attenuates the effects of shocks. The authors run simulations affecting a particular firm at the time, and find that two firms coming from the finance and trade industry cause the highest contagion. In addition, when an entire industry receives a shock, trade and manufacturing industries contagion more companies than the rest. Finally, the model can assist policymakers to monitor the market and evaluate the fragility of the network in different scenarios.

Citation

Estrada, P. and Sánchez-Aragón, L. (2020), "Financial Contagion in Cross-holdings Networks: The Case of Ecuador", de Paula, Á., Tamer, E. and Voia, M.-C. (Ed.) The Econometrics of Networks (Advances in Econometrics, Vol. 42), Emerald Publishing Limited, Leeds, pp. 265-292. https://doi.org/10.1108/S0731-905320200000042017