Multilayer Propagation of Cross-Country Systemic Risk

Economic shocks in international systems propagate not only through financial channels but also through real-sector interactions, creating feedback effects that can amplify systemic risk across countries. However, country-level systemic risk assessments often rely on single-layer analyses, potentially overlooking such cross-channel dynamics. To investigate how country-level systemic risk interpretations differ across propagation layers, we constructed a multilayer network that integrates cross-border financial exposures and real-sector trade linkages. Using BIS Locational Banking Statistics and UN Comtrade data for 20 countries from 2000 to 2023, we developed a multilayer contagion framework that combines continuous within-layer propagation based on DebtRank with a threshold-based mechanism that activates cross-layer contagion when critical loss levels are exceeded. Initial shocks were calibrated using sovereign credit default swap (CDS), which implies default probabilities, to reflect market-based credit risk conditions. The results show that countries’ systemic roles and risk transmission patterns vary across layers and over time, and that incorporating cross-layer amplification reveals vulnerabilities not captured by single-layer models.