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The price of complexity in financial networks

Author

Listed:
  • Stefano Battiston
  • Guido Caldarelli
  • Robert R.M. May
  • Tarik Roukny
  • Joseph Stiglitz

Abstract

Financial institutions form multilayer networks by engaging in contracts with each other and by holding exposures to common assets. As a result, the default probability of one institution depends on the default probability of all of the other institutions in the network. Here, we show how small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults. From the point of view of financial regulators, our findings show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises.

Suggested Citation

  • Stefano Battiston & Guido Caldarelli & Robert R.M. May & Tarik Roukny & Joseph Stiglitz, 2016. "The price of complexity in financial networks," ULB Institutional Repository 2013/239981, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/239981
    Note: SCOPUS: cp.j
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