The formation of a core periphery structure in heterogeneous financial networks

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• van der Leij, M (Universiteit van Amsterdam)
• Friday 22 August 2014, 10:00-10:45
• Seminar Room 2, Newton Institute Gatehouse.

If you have a question about this talk, please contact Mustapha Amrani.

Systemic Risk: Mathematical Modelling and Interdisciplinary Approaches

Recent empirical evidence suggests that financial networks exhibit a core periphery network structure. This paper aims at giving an economic explanation for the emergence of such a structure using network formation theory. Focusing on intermediation benefits, we find that a core periphery network cannot be unilaterally stable when agents are homogeneous. The best-response dynamics converge to a unique unilaterally stable outcome ranging from an empty to denser networks as the costs of linking decrease. A core periphery network structure can form endogenously, however, if we allow for heterogeneity among agents in size. We show that our model can reproduce the observed core periphery structure in the Dutch interbank market for reasonable parameter values.

Joint work with Daan in’t Veld, Marco van der Leij, Cars Hommes

This talk is part of the Isaac Newton Institute Seminar Series series.

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