Financial Contagion in the Laboratory: Does Network Structure Matter?

John Duffy, Aikaterini Karadimitropoulou and Melanie Parravano

Journal of Money, Credit and Banking, 2019, vol. 51, issue 5, 1097-1136

Abstract: We explore the role of interbank network structure and premature liquidation costs for the likelihood of financial contagions in a laboratory experiment. We consider complete versus incomplete networks of banks linked together by interbank deposits, and we further vary premature liquidation costs. Subjects play the role of depositors deciding whether or not to withdraw funds from their interconnected bank. We find that when liquidation costs are high, a complete network structure is significantly less vulnerable to financial contagions than an incomplete network structure. However, when liquidation costs are low, network structure is less important for the frequency of financial contagions.

Date: 2019
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Citations: View citations in EconPapers (13)

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https://doi.org/10.1111/jmcb.12563

Related works:
Working Paper: Financial contagion in the laboratory: Does network structure matter? (2017)
Working Paper: Financial Contagion in the Laboratory: Does Network Structure Matter? (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:51:y:2019:i:5:p:1097-1136

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