The formation of a core periphery structure in heterogeneous financial networks

Cars Hommes, D. in 't Veld () and Marco van der Leij
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D. in 't Veld: University of Amsterdam

No 14-04, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: Recent empirical evidence suggests that financial networks exhibit a core periphery network structure. This paper aims at giving an economic explanation for the emergence of such a structure using network formation theory. Focusing on intermediation benefits, we find that a core periphery network cannot be unilaterally stable when agents are homogeneous. The best-response dynamics converge to a unique unilaterally stable outcome ranging from an empty to denser networks as the costs of linking decrease. A core periphery network structure can form endogenously, however, if we allow for heterogeneity among agents in size. We show that our model can reproduce the observed core periphery structure in the Dutch interbank market for reasonable parameter values.

Date: 2014
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: The formation of a core-periphery structure in heterogeneous financial networks (2020)
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)
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