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The formation of a core periphery structure in heterogeneous financial networks

Listed author(s):
  • van der Leij, M.

    ()

    (University of Amsterdam)

  • in 't Veld, D.

    ()

    (University of Amsterdam)

  • Hommes, C.H.

    ()

    (University of Amsterdam)

Recent empirical evidence suggests that financial networks exhibit a core-periphery network structure. This paper aims at giving an explanation for the emergence of such a structure using network formation theory. We propose a simple model of the overnight interbank lending market, in which banks compete for intermediation benfits. Focusing on the role of bank heterogeneity, we find that a core-periphery network cannot be unilaterally stable when banks are homogeneous. A core-periphery network structure can form endogenously, however, if we allow for heterogeneity among banks in size. Moreover, size heterogeneity may arise endogenously if payoffs feed back into bank size.

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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 16-07.

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Date of creation: 2016
Handle: RePEc:ams:ndfwpp:16-07
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Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands

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