 Default cascades: When does risk diversification increase stability?Stefano Battiston, Domenico Delli Gatti, Mauro Gallegati, Bruce Greenwald and Joseph Stiglitz Journal of Financial Stability, 2012, vol. 8, issue 3, 138-149 Abstract: We explore the dynamics of default cascades in a network of credit interlink-ages in which each agent is at the same time a borrower and a lender. When some counterparties of an agent default, the loss she experiences amounts to her total exposure to those counterparties. A possible conjecture in this context is that individual risk diversification across more numerous counterparties should make also systemic defaults less likely. We show that this view is not always true. In particular, the diversification of credit risk across many borrowers has ambiguous effects on systemic risk in the presence of mechanisms of loss amplifications such as in the presence of potential runs among the short-term lenders of the agents in the network. Keywords: Systemic risk; Network models; Contagion; Financial crisis (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:8:y:2012:i:3:p:138-149 DOI: 10.1016/j.jfs.2012.01.002 Access Statistics for this article Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman More articles in Journal of Financial Stability from Elsevier |
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