The formation of a core-periphery structure in heterogeneous financial networks
Marco van der Leij,
Daan in 't Veld and
Cars Hommes ()
DNB Working Papers from Netherlands Central Bank, Research Department
Recent empirical evidence suggests that financial networks exhibit a core-periphery net- work structure. This paper aims at giving an explanation for the emergence of such a structure using network formation theory. We propose a simple model of the overnight interbank lending market, in which banks compete for intermediation benefits. Focusing on the role of bank heterogeneity, we find that a core-periphery network cannot be unilaterally stable when banks are homogeneous. A core-periphery network structure can form endogenously, however, if we allow for heterogeneity among banks in size. Moreover, size heterogeneity may arise endogenously if payoffs feed back into bank size.
Keywords: financial networks; core-periphery structure; network formation models; over-the-counter markets; interbank market (search for similar items in EconPapers)
JEL-codes: D85 G21 L14 (search for similar items in EconPapers)
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Working Paper: The formation of a core periphery structure in heterogeneous financial networks (2016)
Working Paper: The Formation of a Core Periphery Structure in Heterogeneous Financial Networks (2016)
Working Paper: The formation of a core periphery structure in heterogeneous financial networks (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:528
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