 Contagion and equilibria in diversified financial networksVictor Amelkin, Santosh Venkatesh and Rakesh Vohra Journal of Economic Theory, 2024, vol. 217, issue C Abstract: Diversified cross-shareholding networks are thought to be more resilient to shocks, but diversification also increases the channels by which a shock can spread. To resolve these competing intuitions we introduce a stochastic model of a diversified cross-shareholding network in which a firm's valuation depends on its cash endowment and the shares it owns in other firms. We show that a concentration of measure phenomenon emerges: almost all realized network instances drawn from any probability distribution in a wide class are resilient to contagion if endowments are sufficiently large. Furthermore, the size of a shock needed to trigger widespread financial distress increases with the exposure of firms to each other. Distributions in this class are characterized by the property that a firm's equity shares owned by others are weakly dependent yet lack “dominant” shareholders. Keywords: Financial network; Random network; Systemic risk; Equilibrium; Dynamics; Concentration of measure (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:217:y:2024:i:c:s0022053124000255 DOI: 10.1016/j.jet.2024.105819 Access Statistics for this article Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell More articles in Journal of Economic Theory from Elsevier |
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