The Formation of a Core Periphery Structure in Heterogeneous Financial Networks
Marco van der Leij,
Daan in 't Veld and
Cars Hommes ()
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Daan in 't Veld: University of Amsterdam, the Netherlands
No 14-098/II, Tinbergen Institute Discussion Papers from Tinbergen Institute
Recent empirical evidence suggests that financial networks exhibit a core-periphery network 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-gth, nep-net and nep-ure
Date: 2014-07-28, Revised 2019-05-02
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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:tin:wpaper:20140098
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