Pathways towards instability in financial networks

Marco Bardoscia, Stefano Battiston, Fabio Caccioli and Guido Caldarelli

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Following the financial crisis of 2007–2008, a deep analogy between the origins of instability in financial systems and complex ecosystems has been pointed out: in both cases, topological features of network structures influence how easily distress can spread within the system. However, in financial network models, the details of how financial institutions interact typically play a decisive role, and a general understanding of precisely how network topology creates instability remains lacking. Here we show how processes that are widely believed to stabilize the financial system, that is, market integration and diversification, can actually drive it towards instability, as they contribute to create cyclical structures which tend to amplify financial distress, thereby undermining systemic stability and making large crises more likely. This result holds irrespective of the details of how institutions interact, showing that policy-relevant analysis of the factors affecting financial stability can be carried out while abstracting away from such details.

Keywords: applied mathematics; complex networks; economics (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Date: 2017-02-21
References: Add references at CitEc
Citations: View citations in EconPapers (77)

Published in Nature Communications, 21, February, 2017, 8(14416). ISSN: 2041-1723

Downloads: (external link)
http://eprints.lse.ac.uk/69904/ Open access version. (application/pdf)

Related works:
Working Paper: Pathways towards instability in financial networks (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:69904

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().