DMCA
Systemic risk and stability in financial networks. American Economic Review forthcoming. (2014)
Cached
Download Links
| Citations: | 26 - 0 self |
BibTeX
@MISC{Acemoglu14systemicrisk,
author = {Daron Acemoglu and Asuman Ozdaglar and Alireza Tahbaz-Salehi and David Brown and Ozan Candogan and Gary Gorton and Ali Jadbabaie and Jean-Charles Rochet and Alp Simsek and Ali Shourideh and Rakesh Vohra},
title = {Systemic risk and stability in financial networks. American Economic Review forthcoming.},
year = {2014}
}
Share
 |
 |
 |
 |
||
OpenURL
Abstract
Abstract We provide a framework for studying the relationship between the financial network architecture and the likelihood of systemic failures due to contagion of counterparty risk. We show that financial contagion exhibits a form of phase transition as interbank connections increase: as long as the magnitude and the number of negative shocks affecting financial institutions are sufficiently small, more "complete" interbank claims enhance the stability of the system. However, beyond a certain point, such interconnections start to serve as a mechanism for propagation of shocks and lead to a more fragile financial system. We also show that, under natural contracting assumptions, financial networks that emerge in equilibrium may be socially inefficient due to the presence of a network externality: even though banks take the effects of their lending, risk-taking and failure on their immediate creditors into account, they do not internalize the consequences of their actions on the rest of the network.
