Systemic Risk and Stability in Financial Networks
This paper argues that the extent of financial contagion exhibits a form of phase transition: as long as the magnitude of negative shocks affecting financial institutions are sufficiently small, a more densely connected financial network (corresponding to a more diversified pattern of interbank liab...
| Main Authors: | , , |
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
| Published: |
American Economic Association
2016
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| Online Access: | http://hdl.handle.net/1721.1/100979 https://orcid.org/0000-0002-1827-1285 https://orcid.org/0000-0003-0908-7491 |
| Summary: | This paper argues that the extent of financial contagion exhibits a form of phase transition: as long as the magnitude of negative shocks affecting financial institutions are sufficiently small, a more densely connected financial network (corresponding to a more diversified pattern of interbank liabilities) enhances financial stability. However, beyond a certain point, dense interconnections serve as a mechanism for the propagation of shocks, leading to a more fragile financial system. Our results thus highlight that the same factors that contribute to resilience under certain conditions may function as significant sources of systemic risk under others. |
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