Financial Fragility and Interbank Structure

Yalan Feng

Accounting and Finance Research, 2018, vol. 7, issue 3, 138

Abstract: This paper follows Allen and Gale (2000) to model financial contagion as an equilibrium phenomenon. I assume a two-country economy where banks in each country hold interregional claims on other banks to provide insurance against liquidity preference shocks. The results completely replicate Allen-Gale model. To further test the relative robustness of different market structures I test the implication of moral hazard as in Brusco and Castiglionesi (2007). I find that under certain situation, complete and incomplete structures are equally fragile.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:jfr:afr111:v:7:y:2018:i:3:p:138

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