Low-Rank and Graph-Theoretic Limits of Dynamic Threshold Distress Contagion in Heterogeneous Financial Networks

This study focuses on the propagation of financial distress in directed networks where institutions can recover and re-enter distress, proving that network dynamics with K sender-receiver factor pairs can be exactly represented by a closed system of K feedback equations. Numerical experiments based on sovereign portfolios disclosed by 116 banks show that under the baseline scenario, retaining the two most heavily shocked channels yields a maximum buffer path error approximately one-fifteenth of that from a twelve-mode singular value truncation method.