Network Formation and Financial Fragility
Danilo Lopomo Beteto Wegner
No 179222, Risk and Sustainable Management Group Working Papers from University of Queensland, School of Economics
A tractable model of the formation of financial networks is developed, allowing the use of concepts from portfolio theory. The optimal financial network maximizes a Sharpe ratio defined for financial networks, whereas the equilibrium financial net- work emerges from banks bargaining over future proceeds of co-investment oppor- tunities. Measures of financial fragility, systemic risk and robustness are developed. The equilibrium financial network is shown to be the most connected and with the lowest level of financial fragility, whereas the optimal is the one least connected and with lowest exposure to systemic risk, being also the most robust financial network.
Keywords: Financial; Economics (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:uqsers:179222
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