Abstract: The correlation of assets portfolio in financial institutions is an important cause of indirect financial contagion, but the modeling of this problem has not been studied yet. Considering the correlation between the assets invested by financial institutions, a dynamic evolution model and the simulation algorithm of financial network system based on correlated assets portfolio are constructed; and the impact of assets portfolio correlation, degree of assets diversity and market density (the ratio of financial institutions to assets) on financial contagion are studied. Simulation results show that the positive correlation between assets portfolio exacerbates financial contagion, while the negative correlation buffers and counteracts the impact. When the degree of assets diversity increases, the probability of contagion increases first and then decreases gradually. The probability of contagion is maximum when the market density is 1 (the number of financial institutions is equal to the number of assets). These results provide the basis of decision making for financial regulators.

Key words: assets portfolio correlation, indirect financial contagion, dynamic evolution model, simulation algorithm