Systemic Risk and Stability in Financial Networks
Author(s)
Acemoglu, Daron; Tahbaz-Salehi, Alireza; Ozdaglar, Asuman E.
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This paper argues that the extent of financial contagion exhibits a form of phase transition: as long as the magnitude of negative shocks affecting financial institutions are sufficiently small, a more densely connected financial network (corresponding to a more diversified pattern of interbank liabilities) enhances financial stability. However, beyond a certain point, dense interconnections serve as a mechanism for the propagation of shocks, leading to a more fragile financial system. Our results thus highlight that the same factors that contribute to resilience under certain conditions may function as significant sources of systemic risk under others.
Date issued
2015-02Department
Massachusetts Institute of Technology. Department of Economics; Massachusetts Institute of Technology. Department of Electrical Engineering and Computer Science; Massachusetts Institute of Technology. Laboratory for Information and Decision SystemsJournal
American Economic Review
Publisher
American Economic Association
Citation
Acemoglu, Daron, Asuman Ozdaglar, and Alireza Tahbaz-Salehi. “Systemic Risk and Stability in Financial Networks.” American Economic Review 105, no. 2 (February 2015): 564–608.
Version: Final published version
ISSN
0002-8282
1944-7981