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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

Abstract: 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)
New Economics Papers: this item is included in nep-ure
Date: 2016-10
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Related works:
Working Paper: The formation of a core periphery structure in heterogeneous financial networks (2016) Downloads
Working Paper: The Formation of a Core Periphery Structure in Heterogeneous Financial Networks (2016) Downloads
Working Paper: The formation of a core periphery structure in heterogeneous financial networks (2014) Downloads
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