Risk Sharing and Contagion in Networks

Antonio Cabrales, Piero Gottardi and Fernando Vega-Redondo

The Review of Financial Studies, 2017, vol. 30, issue 9, 3086-3127

Abstract: We investigate the socially optimal design of financial networks, that allows to tackle the trade-off between risk sharing and contagion. We identify conditions on the shock distribution under which full integration or maximal segmentation is optimal. We also show that, under different conditions, the optimal network displays different levels of strength of linkages to other firms or intermediate degrees of segmentation. In the latter case, the individual and social incentives to establish linkages are not necessarily aligned. When firms face heterogeneous distributions of risks, they should optimally form linkages only with firms facing risks of the same kind.Received November 8, 2014; editorial decision April 28, 2017 by Editor Itay Goldstein.

JEL-codes: C72 D85 G21 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (80)

Downloads: (external link)
http://hdl.handle.net/10.1093/rfs/hhx077 (application/pdf)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Risk-Sharing and Contagion in Networks (2014)
Working Paper: Risk-sharing and contagion in networks (2014)
Working Paper: Risk Sharing and Contagion in Networks (2014)
Working Paper: Risk-sharing and contagion in networks (2013)
Working Paper: Risk-Sharing and Contagion in Networks (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:oup:rfinst:v:30:y:2017:i:9:p:3086-3127.

Ordering information: This journal article can be ordered from
https://academic.oup.com/journals

Access Statistics for this article

The Review of Financial Studies is currently edited by Itay Goldstein

More articles in The Review of Financial Studies from Society for Financial Studies Oxford University Press, Journals Department, 2001 Evans Road, Cary, NC 27513 USA.. Contact information at EDIRC.
Bibliographic data for series maintained by Oxford University Press ().