Uncertainty in an Interconnected Financial System, Contagion, and Market Freezes
This paper studies contagion and market freezes caused by uncertainty in financial network structures and provides theoretical guidance for central banks. We establish a formal model to demonstrate that, in a financial system where financial institutions are interconnected, a negative shock to an individual financial institution could spread to other institutions, causing market freezes because of creditorsâ€™ uncertainty about the financial network structure. Central bank policies to alleviate market freezes and contagion, such as information policy, bailout policy and the lender of last resort policy, are examined.
|Date of creation:||May 2013|
|Date of revision:|
|Contact details of provider:|| Postal: Kingston, Ontario, K7L 3N6|
Phone: (613) 533-2250
Fax: (613) 533-6668
Web page: http://qed.econ.queensu.ca/
More information through EDIRC
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.:
- Douglas W. Diamond & Raghuram G. Rajan, 2011. "Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 557-591.
- Gai, Prasanna & Haldane, Andrew & Kapadia, Sujit, 2011. "Complexity, concentration and contagion," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 453-470.
- Easley, David & O'Hara, Maureen, 2010. "Liquidity and valuation in an uncertain world," Journal of Financial Economics, Elsevier, vol. 97(1), pages 1-11, July.
- Rochet, Jean-Charles & Tirole, Jean, 1996.
"Interbank Lending and Systemic Risk,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 28(4), pages 733-62, November.
- John Moore & Nobuhiro Kiyotaki, .
1995-5, Edinburgh School of Economics, University of Edinburgh.
- Ricardo J. Caballero & Arvind Krishnamurthy, 2007.
"Collective Risk Management in a Flight to Quality Episode,"
NBER Working Papers
12896, National Bureau of Economic Research, Inc.
- Ricardo J. Caballero & Arvind Krishnamurthy, 2008. "Collective Risk Management in a Flight to Quality Episode," Journal of Finance, American Finance Association, vol. 63(5), pages 2195-2230, October.
- Amil Dasgupta, 2004. "Financial Contagion Through Capital Connections: A Model of the Origin and Spread of Bank Panics," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1049-1084, December.
- Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
- Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2010.
"Outside And Inside Liquidity,"
1395, Princeton University, Department of Economics, Econometric Research Program..
- Yehning Chen, 1999. "Banking Panics: The Role of the First-Come, First-Served Rule and Information Externalities," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 946-968, October.
- Franklin Allen & Ana Babus & Elena Carletti, 2010.
"Financial Connections and Systemic Risk,"
Economics Working Papers
ECO2010/26, European University Institute.
- Allen, Franklin & Babus, Ana & Carletti, Elena, 2010. "Financial Connections and Systemic Risk," Working Papers 10-20, University of Pennsylvania, Wharton School, Weiss Center.
- Franklin Allen & Ana Babus & Elena Carletti, 2010. "Financial Connections and Systemic Risk," Economics Working Papers ECO2010/30, European University Institute.
- Franklin Allen & Ana Babus & Elena Carletti, 2010. "Financial Connections and Systemic Risk," NBER Working Papers 16177, National Bureau of Economic Research, Inc.
- Allen, F. & Babus, A. & Carletti, E., 2010. "Financial Connections and Systemic Risk," Discussion Paper 2010-88S, Tilburg University, Center for Economic Research.
- Ricardo J. Caballero & Alp Simsek, 2013.
"Fire Sales in a Model of Complexity,"
Journal of Finance,
American Finance Association, vol. 68(6), pages 2549-2587, December.
- Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, March.
When requesting a correction, please mention this item's handle: RePEc:qed:wpaper:1308. 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: (Mark Babcock)
If references are entirely missing, you can add them using this form.