This paper is concerned with systemic risk in the interbank market. We model this market as a directed graph in which the banks represent the nodes and the liabilities between the banks represent the edges. Our work builds on the modelling paradigm of Eisenberg and Noe (2001, Management Science,...

We develop a new model for solvency contagion that can be used to quantify systemic risk in stress tests of financial networks. In contrast to many existing models it allows for the spread of contagion already before the point of default and hence can account for contagion due to distress and...