Systemic Risk and Stability in Financial Networks

2015/02/01 by Daron Acemoglu, Daron Acemoğlu, Asuman Ozdaglar +1 · 50 citations
Economics, Econometrics and Finance · #Banking stability, regulation, efficiency #Economic theories and models #Complex Systems and Time Series Analysis

paper · doi:10.1257/aer.20130456

Abstract

This paper argues that the extent of financial contagion exhibits a form of phase transition: as long as the magnitude of negative shocks affecting financial institutions are sufficiently small, a more densely connected financial network (corresponding to a more diversified pattern of interbank liabilities) enhances financial stability. However, beyond a certain point, dense interconnections serve as a mechanism for the propagation of shocks, leading to a more fragile financial system. Our results thus highlight that the same factors that contribute to resilience under certain conditions may function as significant sources of systemic risk under others. (JEL D85, E44, G21, G28, L14)

Citations

• The Network Origins of Aggregate Fluctuations

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