Advanced Search
MyIDEAS: Login

Default Cascades: When Does Risk Diversification Increase Stability?

Contents:

Author Info

  • Stefano Battiston

    ()

  • Domenico Delli Gatti
  • Mauro Gallegati
  • Bruce Greenwald
  • Joseph E. Stiglitz

Abstract

We explore the dynamics of default cascades in a network of credit interlinkages in which each agent is at the same time a borrower and a lender. When some counterparties of an agent default, the loss she experiences amounts to her total exposure to those counterparties. A possible conjecture in this context is that individual risk diversification across more numerous counterparties should make also systemic defaults less likely. We show that this view is not always true. In particular, the diversification of credit risk across many borrowers has ambiguous effects on systemic risk in the presence of mechanisms of loss amplifications such as in the presence of potential runs among the short-term lenders of the agents in the network.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: ftp://web.sg.ethz.ch/RePEc/stz/wpaper/pdf/ETH-RC-11-006.pdf
Download Restriction: no

Bibliographic Info

Paper provided by ETH Zurich, Chair of Systems Design in its series Working Papers with number ETH-RC-11-006.

as in new window
Length:
Date of creation:
Date of revision:
Handle: RePEc:stz:wpaper:eth-rc-11-006

Contact details of provider:
Postal: ETH Zentrum KPL F 38.1, Kreuzplatz 5, 8032 Zürich
Phone: +41 1 632 57 18
Fax: +41 1 632 10 47
Web page: http://web.sg.ethz.ch/wps
More information through EDIRC

Related research

Keywords: Systemic risk; Network models; Contagion; Financial acceleration; Financial crises;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
  2. Stefano Battiston & Domenico Delli Gatti & Mauro Gallegati & Bruce C. Greenwald & Joseph E. Stiglitz, 2009. "Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk," NBER Working Papers 15611, National Bureau of Economic Research, Inc.
  3. Markus K. Brunnermeier, 2008. "Deciphering the Liquidity and Credit Crunch 2007-08," NBER Working Papers 14612, National Bureau of Economic Research, Inc.
  4. Michael Boss & Martin Summer & Stefan Thurner, 2004. "Contagion Flow Through Banking Networks," Papers cond-mat/0403167, arXiv.org.
  5. Allen, F. & Babus, A. & Carletti, E., 2010. "Financial Connections and Systemic Risk," Discussion Paper 2010-88S, Tilburg University, Center for Economic Research.
  6. Wagner, Wolf, 2010. "Diversification at financial institutions and systemic crises," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 373-386, July.
  7. Furfine, Craig H, 2003. " Interbank Exposures: Quantifying the Risk of Contagion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(1), pages 111-28, February.
  8. Joseph E. Stiglitz, 2010. "Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable," NBER Working Papers 15718, National Bureau of Economic Research, Inc.
  9. Rochet, Jean-Charles & Vives, Xavier, 2002. "Coordination failures and the lender of last resort : was Bagehot right after all?," HWWA Discussion Papers 184, Hamburg Institute of International Economics (HWWA).
  10. Upper, Christian, 2011. "Simulation methods to assess the danger of contagion in interbank markets," Journal of Financial Stability, Elsevier, vol. 7(3), pages 111-125, August.
  11. Acharya, Viral V., 2009. "A Theory of Systemic Risk and Design of Prudential Bank Regulation," CEPR Discussion Papers 7164, C.E.P.R. Discussion Papers.
  12. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, vol. 52(9), pages 1301-1314, September.
  13. Bartram, Sohnke M. & Brown, Gregory W. & Hund, John E., 2007. "Estimating systemic risk in the international financial system," Journal of Financial Economics, Elsevier, vol. 86(3), pages 835-869, December.
  14. Hyun Song Shin, 2006. "Risk and liquidity in a system context," BIS Working Papers 212, Bank for International Settlements.
  15. Castiglionesi, F. & Navarro, N., 2007. "Optimal Fragile Financial Networks," Discussion Paper 2007-100, Tilburg University, Center for Economic Research.
  16. Iori, Giulia & Jafarey, Saqib & Padilla, Francisco G., 2006. "Systemic risk on the interbank market," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 525-542, December.
  17. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
  18. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Chinazzi, Matteo & Fagiolo, Giorgio & Reyes, Javier A. & Schiavo, Stefano, 2013. "Post-mortem examination of the international financial network," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1692-1713.
  2. Charles D. Brummitt & Rajiv Sethi & Duncan J. Watts, 2014. "Inside Money, Procyclical Leverage, and Banking Catastrophes," Papers 1403.1637, arXiv.org.
  3. Merwan Engineer & Paul Schure & Mark Gillis, 2012. "A Positive Analysis of Deposit Insurance Provision: Regulatory Competition Among European Union Countries," Working Paper Series 29_12, The Rimini Centre for Economic Analysis.
  4. Tasca, Paolo & Battiston, Stefano, 2013. "Market Procyclicality and Systemic Risk," MPRA Paper 45156, University Library of Munich, Germany, revised Mar 2013.
  5. Edoardo Gaffeo & Massimo Molinari, 2014. "Macroprudential Consolidation Policy in Interbank Networks," DEM Discussion Papers 2014/01, Department of Economics and Management.
  6. Rahul Kaushik & Stefano Battiston, . "Credit Default Swaps Drawup Networks: Too Tied To Be Stable?," Working Papers ETH-RC-12-013, ETH Zurich, Chair of Systems Design.
  7. Minoiu, Camelia & Reyes, Javier A., 2013. "A network analysis of global banking: 1978–2010," Journal of Financial Stability, Elsevier, vol. 9(2), pages 168-184.
  8. Sergio R. S. Souza & Benjamin M. Tabak & Solange M. Guerra, 2013. "Insolvency and Contagion in the Brazilian Interbank Market," Working Papers Series 320, Central Bank of Brazil, Research Department.
  9. Lou, Weifang & Yin, Xiangkang, 2014. "The impact of the global financial crisis on mortgage pricing and credit supply," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 336-363.
  10. Alvarez, Fernando & Barlevy, Gadi, 2014. "Mandatory Disclosure and Financial Contagion," Working Paper Series WP-2014-4, Federal Reserve Bank of Chicago.
  11. H Peyton Young & Paul Glasserman, 2013. "How Likely is Contagion in Financial Networks?," Economics Series Working Papers 642, University of Oxford, Department of Economics.
  12. Josselin Garnier & George Papanicolaou & Tzu-Wei Yang, 2012. "Large deviations for a mean field model of systemic risk," Papers 1204.3536, arXiv.org, revised Aug 2012.
  13. Carlos León & Clara Machado & Miguel Sarmiento, 2014. "Identifying central bank liquidity super-spreaders in interbank funds networks," BORRADORES DE ECONOMIA 011187, BANCO DE LA REPÚBLICA.
  14. carlos León & Ron J. Berndsen, 2013. "Modular scale-free architecture of Colombian financial networks: Evidence and challenges with financial stability in view," Borradores de Economia 799, Banco de la Republica de Colombia.
  15. Joseph E. Stiglitz, 2013. "Stable Growth in an Era of Crises; Learning from Economic Theory and History," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 2(1), pages 1-39, January.
  16. Grzegorz Hałaj & Christoffer Kok, 2013. "Assessing interbank contagion using simulated networks," Computational Management Science, Springer, vol. 10(2), pages 157-186, June.
  17. Li, Xi Hao, 2013. "Standardization for Agent-based Modeling in Economics," MPRA Paper 47396, University Library of Munich, Germany.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:stz:wpaper:eth-rc-11-006. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Claudio J. Tessone).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.