Uncertainty in an Interconnected Financial System, Contagion, and Market Freezes

Mei Li, Frank Milne and Junfeng Qiu ()

Journal of Money, Credit and Banking, 2016, vol. 48, issue 6, 1135-1168

Abstract: This paper studies contagion and market freezes caused by uncertainty in financial network structures. Our model demonstrates that in a financial system where financial institutions are interconnected, a negative shock to an individual financial institution could spread to other institutions, causing market freezes because of creditors' uncertainty about the financial network structure. Our model also reveals that when both a large creditor and a continuum of small creditors are present, the size of the large creditor will affect the severity of market freezes substantially. Moreover, our model is used to examine central bank policies to alleviate market freezes.

Date: 2016
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https://doi.org/10.1111/jmcb.12329

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Working Paper: Uncertainty In An Interconnected Financial System, Contagion, And Market Freezes (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:48:y:2016:i:6:p:1135-1168

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