Systemic Risk and Stability in Financial Networks
Coauthor(s): Daron Acemoglu, Asuman Ozdaglar.
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.
Source: American Economic Review
Acemoglu, Daron, Asuman Ozdaglar, and Alireza Tahbaz-Salehi. "Systemic Risk and Stability in Financial Networks." American Economic Review 105, no. 2 (2015): 564-608.