Systemic Risk and Stability in Financial Networks
American Economic Review
vol. 105,
no. 2, February 2015
(pp. 564-608)
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)Citation
Acemoglu, Daron, Asuman Ozdaglar, and Alireza Tahbaz-Salehi. 2015. "Systemic Risk and Stability in Financial Networks." American Economic Review, 105 (2): 564-608. DOI: 10.1257/aer.20130456Additional Materials
JEL Classification
- D85 Network Formation and Analysis: Theory
- E44 Financial Markets and the Macroeconomy
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation
- L14 Transactional Relationships; Contracts and Reputation; Networks