Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk

Stefano Battiston, Domenico Delli Gatti, Mauro Gallegati, Bruce Greenwald and Joseph Stiglitz

Journal of Economic Dynamics and Control, 2012, vol. 36, issue 8, 1121-1141

Abstract: The recent financial crisis poses the challenge to understand how systemic risk arises endogenously and what architecture can make the financial system more resilient to global crises. This paper shows that a financial network can be most resilient for intermediate levels of risk diversification, and not when this is maximal, as generally thought so far. This finding holds in the presence of the financial accelerator, i.e. when negative variations in the financial robustness of an agent tend to persist in time because they have adverse effects on the agent's subsequent performance through the reaction of the agent's counterparties.

Keywords: Systemic risk; Network models; Contagion; Financial acceleration; Financial crisis (search for similar items in EconPapers)
JEL-codes: D85 G01 G21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (398)

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Working Paper: Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:36:y:2012:i:8:p:1121-1141

DOI: 10.1016/j.jedc.2012.04.001

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