Financial Networks and Contagion

Matthew Elliott, Benjamin Golub and Matthew Jackson

American Economic Review, 2014, vol. 104, issue 10, 3115-53

Abstract: We study cascades of failures in a network of interdependent financial organizations: how discontinuous changes in asset values (e.g., defaults and shutdowns) trigger further failures, and how this depends on network structure. Integration (greater dependence on counterparties) and diversification (more counterparties per organization) have different, nonmonotonic effects on the extent of cascades. Diversification connects the network initially, permitting cascades to travel; but as it increases further, organizations are better insured against one another's failures. Integration also faces trade-offs: increased dependence on other organizations versus less sensitivity to own investments. Finally, we illustrate the model with data on European debt cross-holdings.

JEL-codes: D85 F34 F65 G15 G32 G33 H63 (search for similar items in EconPapers)
Date: 2014
Note: DOI: 10.1257/aer.104.10.3115
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Citations: View citations in EconPapers (533)

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