Uncertainty In An Interconnected Financial System, Contagion, And Market Freezes

Mei Li, Frank Milne and Junfeng Qiu ()

No 1308, Working Paper from Economics Department, Queen's University

Abstract: This paper studies contagion and market freezes caused by uncertainty in financial network structures and provides theoretical guidance for central banks. We establish a formal model to demonstrate that, in a financial system where financial institutions are interconnected, a negative shock to an individual financial institution could spread to other institutions, causing market freezes because of creditorsÂ’ uncertainty about the financial network structure. Central bank policies to alleviate market freezes and contagion, such as information policy, bailout policy and the lender of last resort policy, are examined.

Keywords: Interconnection; Market Freezes; Contagion; Financial Crises (search for similar items in EconPapers)
JEL-codes: D82 G2 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2013-05
New Economics Papers: this item is included in nep-ban, nep-cba and nep-net
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1308

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