[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/24406.html
   My bibliography  Save this paper

Financial Centrality and Liquidity Provision

Author

Listed:
  • Arun G. Chandrasekhar
  • Robert Townsend
  • Juan Pablo Xandri
Abstract
We study an endowment economy in which agents face income risk, as if uncertain returns on a portfolio, and agents can only make transfers in states when they are actively participating in the market. Besides income risk, agents also have limited and stochastic market access, with a probability distribution governed by an underlying social network. While network connections may serve to dissipate shocks, they may also provide obstacles to the sharing of risk, as when participation frictions are generated through the network. We identify and quantify the value of key players in terms of whether they are likely to be able to smooth the resulting market participation risk and how valuable that smoothing would be when they are there. We define financial centrality in economic terms, given the model, as the ex ante marginal social value of injecting an infinitesimal amount of liquidity to the agent. We show that the most financially central agents are not only those who trade often – as in standard network models – but are more likely to trade when there are few traders, when income risk is high, when income shocks are positively correlated, when attitudes toward risk are more sensitive in the aggregate, when there are distressed institutions, and when there are tail risks. We extend our framework to allow for endogenous market participation. Observational evidence from village risk sharing network data is consistent with our model.

Suggested Citation

  • Arun G. Chandrasekhar & Robert Townsend & Juan Pablo Xandri, 2018. "Financial Centrality and Liquidity Provision," NBER Working Papers 24406, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:24406
    Note: AP DEV EFG IFM TWP
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w24406.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jaramillo, Miguel, 2012. "The spatial geography of teacher labor markets: Evidence from a developing country," Economics of Education Review, Elsevier, vol. 31(6), pages 984-995.
    2. Gai, Prasanna & Kapadia, Sujit, 2010. "Contagion in financial networks," Bank of England working papers 383, Bank of England.
    3. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
    4. Attila Ambrus & Markus Mobius & Adam Szeidl, 2014. "Consumption Risk-Sharing in Social Networks," American Economic Review, American Economic Association, vol. 104(1), pages 149-182, January.
    5. Upper, Christian & Worms, Andreas, 2004. "Estimating bilateral exposures in the German interbank market: Is there a danger of contagion?," European Economic Review, Elsevier, vol. 48(4), pages 827-849, August.
    6. Jackson, Matthew O. & Wolinsky, Asher, 1996. "A Strategic Model of Social and Economic Networks," Journal of Economic Theory, Elsevier, vol. 71(1), pages 44-74, October.
    7. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    8. Battiston, Stefano & Delli Gatti, Domenico & Gallegati, Mauro & Greenwald, Bruce & Stiglitz, Joseph E., 2012. "Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1121-1141.
    9. Alvarez, Fernando & Barlevy, Gadi, 2021. "Mandatory disclosure and financial contagion," Journal of Economic Theory, Elsevier, vol. 194(C).
    10. Martin Summer, 2013. "Financial Contagion and Network Analysis," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 277-297, November.
    11. Langfield, Sam & Liu, Zijun & Ota, Tomohiro, 2014. "Mapping the UK interbank system," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 288-303.
    12. Bech, Morten L. & Atalay, Enghin, 2010. "The topology of the federal funds market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(22), pages 5223-5246.
    13. Craig, Ben & von Peter, Goetz, 2014. "Interbank tiering and money center banks," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 322-347.
    14. Freeman, Scott, 1996. "The Payments System, Liquidity, and Rediscounting," American Economic Review, American Economic Association, vol. 86(5), pages 1126-1138, December.
    15. Daron Acemoglu & Asuman Ozdaglar & Alireza Tahbaz-Salehi, 2015. "Systemic Risk and Stability in Financial Networks," American Economic Review, American Economic Association, vol. 105(2), pages 564-608, February.
    16. Samphantharak,Krislert & Townsend,Robert M., 2010. "Households as Corporate Firms," Cambridge Books, Cambridge University Press, number 9780521195829, September.
    17. John C. Harsanyi, 1967. "Games with Incomplete Information Played by "Bayesian" Players, I-III Part I. The Basic Model," Management Science, INFORMS, vol. 14(3), pages 159-182, November.
    18. Ana Babus, 2016. "The formation of financial networks," RAND Journal of Economics, RAND Corporation, vol. 47(2), pages 239-272, May.
    19. Cocco, João F. & Gomes, Francisco J. & Martins, Nuno C., 2009. "Lending relationships in the interbank market," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 24-48, January.
    20. Freixas, Xavier & Parigi, Bruno M & Rochet, Jean-Charles, 2000. "Systemic Risk, Interbank Relations, and Liquidity Provision by the Central Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 611-638, August.
    21. Hojman, Daniel A. & Szeidl, Adam, 2008. "Core and periphery in networks," Journal of Economic Theory, Elsevier, vol. 139(1), pages 295-309, March.
    22. Loistl, Otto, 1976. "The Erroneous Approximation of Expected Utility by Means of a Taylor's Series Expansion: Analytic and Computational Results," American Economic Review, American Economic Association, vol. 66(5), pages 904-910, December.
    23. Benjamin Lester & Roc Armenter, 2015. "Excess Reserves and Monetary Policy Normalization," 2015 Meeting Papers 586, Society for Economic Dynamics.
    24. Edward J. Green & Ruilin Zhou, 2002. "Dynamic Monetary Equilibrium in a Random Matching Economy," Econometrica, Econometric Society, vol. 70(3), pages 929-969, May.
    25. Hong, Yili, 2013. "On computing the distribution function for the Poisson binomial distribution," Computational Statistics & Data Analysis, Elsevier, vol. 59(C), pages 41-51.
    26. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    27. Terrence Hendershott & Ananth Madhavan, 2015. "Click or Call? Auction versus Search in the Over-the-Counter Market," Journal of Finance, American Finance Association, vol. 70(1), pages 419-447, February.
    28. Ehm, Werner, 1991. "Binomial approximation to the Poisson binomial distribution," Statistics & Probability Letters, Elsevier, vol. 11(1), pages 7-16, January.
    29. Franklin Allen & Ana Babus & Elena Carletti, 2009. "Financial Crises: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 97-116, November.
    30. Rama Cont & Amal Moussa & Edson B Santos, 2013. "Network structure and systemic risk in banking systems," Post-Print hal-00912018, HAL.
    31. Trejos, Alberto & Wright, Randall, 1995. "Search, Bargaining, Money, and Prices," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 118-141, February.
    32. Michael Boss & Helmut Elsinger & Martin Summer & Stefan Thurner, 2004. "Network topology of the interbank market," Quantitative Finance, Taylor & Francis Journals, vol. 4(6), pages 677-684.
    33. Douglas M. Gale & Shachar Kariv, 2007. "Financial Networks," American Economic Review, American Economic Association, vol. 97(2), pages 99-103, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Arun Chandrasekhar & Robert Townsend & Juan Pablo Pablo Xandri, 2019. "Financial Centrality and the Value of Key Players," Working Papers 2019-26, Princeton University. Economics Department..
    2. Maryam Farboodi, 2014. "Intermediation and Voluntary Exposure to Counterparty Risk," 2014 Meeting Papers 365, Society for Economic Dynamics.
    3. Paul Glasserman & Peyton Young, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    4. Hüser, Anne-Caroline, 2016. "Too interconnected to fail: A survey of the Interbank Networks literature," SAFE Working Paper Series 91, Leibniz Institute for Financial Research SAFE, revised 2016.
    5. Paul Glasserman & H. Peyton Young, 2015. "Contagion in Financial Markets," Working Papers 15-21, Office of Financial Research, US Department of the Treasury.
    6. Marco Bardoscia & Paolo Barucca & Stefano Battiston & Fabio Caccioli & Giulio Cimini & Diego Garlaschelli & Fabio Saracco & Tiziano Squartini & Guido Caldarelli, 2021. "The Physics of Financial Networks," Papers 2103.05623, arXiv.org.
    7. Pablo Rovira Kaltwasser & Alessandro Spelta, 2019. "Identifying systemically important financial institutions: a network approach," Computational Management Science, Springer, vol. 16(1), pages 155-185, February.
    8. Bluhm, Marcel, 2018. "Persistent liquidity shocks and interbank funding," Journal of Financial Stability, Elsevier, vol. 36(C), pages 246-262.
    9. Craig, Ben & von Peter, Goetz, 2014. "Interbank tiering and money center banks," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 322-347.
    10. in 't Veld, Daan & van der Leij, Marco & Hommes, Cars, 2020. "The formation of a core-periphery structure in heterogeneous financial networks," Journal of Economic Dynamics and Control, Elsevier, vol. 119(C).
    11. Liu, Anqi & Paddrik, Mark & Yang, Steve Y. & Zhang, Xingjia, 2020. "Interbank contagion: An agent-based model approach to endogenously formed networks," Journal of Banking & Finance, Elsevier, vol. 112(C).
    12. Lopomo Beteto Wegner, Danilo, 2020. "Liquidity policies and financial fragility," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 135-153.
    13. Morteza Alaeddini & Philippe Madiès & Paul J. Reaidy & Julie Dugdale, 2023. "Interbank money market concerns and actors’ strategies—A systematic review of 21st century literature," Journal of Economic Surveys, Wiley Blackwell, vol. 37(2), pages 573-654, April.
    14. Andre R. Neveu, 2018. "A survey of network-based analysis and systemic risk measurement," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 241-281, July.
    15. Sadamori Kojaku & Giulio Cimini & Guido Caldarelli & Naoki Masuda, 2018. "Structural changes in the interbank market across the financial crisis from multiple core-periphery analysis," Papers 1802.05139, arXiv.org.
    16. Gofman, Michael, 2017. "Efficiency and stability of a financial architecture with too-interconnected-to-fail institutions," Journal of Financial Economics, Elsevier, vol. 124(1), pages 113-146.
    17. Accominotti, Olivier & Lucena-Piquero, Delio & Ugolini, Stefano, 2023. "Intermediaries’ substitutability and financial network resilience: A hyperstructure approach," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    18. Fabio Caccioli & Paolo Barucca & Teruyoshi Kobayashi, 2018. "Network models of financial systemic risk: a review," Journal of Computational Social Science, Springer, vol. 1(1), pages 81-114, January.
    19. Iori, Giulia & Mantegna, Rosario N. & Marotta, Luca & Miccichè, Salvatore & Porter, James & Tumminello, Michele, 2015. "Networked relationships in the e-MID interbank market: A trading model with memory," Journal of Economic Dynamics and Control, Elsevier, vol. 50(C), pages 98-116.
    20. Eboli, Mario, 2019. "A flow network analysis of direct balance-sheet contagion in financial networks," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 205-233.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:24406. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.