Self-organized criticality in a model of collective bankruptcies

A. Aleksiejuk, J.A. Holyst

Abstract
The question we address here is of whether phenomena of collective
bankruptcies are related to self-organized criticality. In order to answer
it we propose a simple model of banking networks [1] based on random
directed percolation. In comparison to previous work, the major
development of the present model is the implementation of the concept of
banking balance, which when positive, can be invested to make profits, but
when negative, must be refilled to prevent the loss of liquidity. Directed
connections between the nodes of bank lattice simulate flows of money.
Since we assign weights to these connections, the model may be termed as
'weighted percolation'. We study effects of one bank's failure on the
nucleation of contagion phase in a financial market. We recognize the
power law distribution of contagion sizes as an indicator of
self-organized critical behavior of the model

[1] A. Aleksiejuk, J.A. Hoyst, A simple model of bank bankruptcies,
arXiv: cond-mat/0109119, Physica A (2001) in press.