Systemic Risk and Stability in Financial Networks

Daron Acemoglu, Asuman Ozdaglar and Alireza Tahbaz-Salehi

American Economic Review, 2015, vol. 105, issue 2, 564-608

Abstract: This paper argues that the extent of financial contagion exhibits a form of phase transition: as long as the magnitude of negative shocks affecting financial institutions are sufficiently small, a more densely connected financial network (corresponding to a more diversified pattern of interbank liabilities) enhances financial stability. However, beyond a certain point, dense interconnections serve as a mechanism for the propagation of shocks, leading to a more fragile financial system. Our results thus highlight that the same factors that contribute to resilience under certain conditions may function as significant sources of systemic risk under others. (JEL D85, E44, G21, G28, L14)

JEL-codes: D85 E44 G21 G28 L14 (search for similar items in EconPapers)
Date: 2015
Note: DOI: 10.1257/aer.20130456
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Citations: View citations in EconPapers (895)

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Working Paper: Systemic Risk and Stability in Financial Networks (2013)
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