The formation of a core-periphery structure in heterogeneous financial networks

Daan in 't Veld, Marco van der Leij and Cars Hommes

Journal of Economic Dynamics and Control, 2020, vol. 119, issue C

Abstract: Recent empirical evidence suggests that financial networks exhibit a core-periphery network structure. This paper aims at giving an explanation for the emergence of such a structure using network formation theory. We propose a general, stylized model of the interbank trading market, in which banks compete for intermediation benefits. Focusing on the role of bank heterogeneity, we find that a core-periphery network cannot be unilaterally stable when banks are homogeneous. A core-periphery network structure can form endogenously, however, if we allow for heterogeneity among banks in size. Moreover, size heterogeneity may arise endogenously if payoffs feed back into bank size.

Keywords: Financial networks; Core-periphery structure; Network formation models; Over-the-counter markets; Interbank market (search for similar items in EconPapers)
JEL-codes: D85 G21 L14 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: The Formation of a Core Periphery Structure in Heterogeneous Financial Networks (2019)
Working Paper: The formation of a core periphery structure in heterogeneous financial networks (2016)
Working Paper: The formation of a core periphery structure in heterogeneous financial networks (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:119:y:2020:i:c:s0165188920301408

DOI: 10.1016/j.jedc.2020.103972

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