The price of complexity in financial networks

Stefano Battiston, Guido Caldarelli, Robert R.M. May, Tarik Roukny and Joseph Stiglitz

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: Financial institutions form multilayer networks by engaging in contracts with each other and by holding exposures to common assets. As a result, the default probability of one institution depends on the default probability of all of the other institutions in the network. Here, we show how small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults. From the point of view of financial regulators, our findings show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises.

Keywords: Complexity; Default probability; Financial contagion; Financial networks; Systemic risk (search for similar items in EconPapers)
Date: 2016-09
Note: SCOPUS: cp.j
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Published in: Proceedings of the National Academy of Sciences of the United States of America (2016) v.113 n° 36,p.10031-10036

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Persistent link: https://EconPapers.repec.org/RePEc:ulb:ulbeco:2013/239981

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