A discrete dynamics approach to interbank financial contagion

The purpose of this paper is to describe in terms of mathematical models and systems theory the dynamics of interbank financial contagion. Such a description gives rise to a model that can be studied with mathematical tools and will provide a new framework for the study of contagion dynamics complementary to research by simulation studied so far. It provides a better understanding of such financial networks and a unifying network for the research of financial contagion. The mathematical description we present is in terms of Boolean dynamical systems and a linear operator. We relate the properties of the dynamical systems to the properties of the operator.