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Rollover risk, network structure and systemic financial crises

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  • Anand, Kartik
  • Gai, Prasanna
  • Marsili, Matteo

Abstract

The breakdown of short-term funding markets was a key feature of the global financial crisis of 2007/2008. Drawing on ideas from global games and network growth, we show how network topology interacts with the funding structure of financial institutions to determine system-wide crises. Bad news about a financial institution can lead others to lose confidence in it and their withdrawals, in turn, trigger problems across the interbank network. Once broken, credit relations take a long time to re-establish as a result of common knowledge of the equilibrium. Our findings shed light on public policy responses during and after the crisis.

Suggested Citation

  • Anand, Kartik & Gai, Prasanna & Marsili, Matteo, 2012. "Rollover risk, network structure and systemic financial crises," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1088-1100.
  • Handle: RePEc:eee:dyncon:v:36:y:2012:i:8:p:1088-1100
    DOI: 10.1016/j.jedc.2012.03.005
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    More about this item

    Keywords

    Interbank networks; Credit crisis; Liquidity freeze;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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