Financial networks and contagion

Matthew Elliott*, Benjamin Golub, Matthew O. Jackson

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

298 Scopus citations

Abstract

We study cascades of failures in a network of interdependent financial organizations: how discontinuous changes in asset values (e.g., defaults and shutdowns) trigger further failures, and how this depends on network structure. Integration (greater dependence on counterparties) and diversification (more counterparties per organization) have different, nonmonotonic effects on the extent of cascades. Diversification connects the network initially, permitting cascades to travel; but as it increases further, organizations are better insured against one another's failures. Integration also faces trade-offs: increased dependence on other organizations versus less sensitivity to own investments. Finally, we illustrate the model with data on European debt cross-holdings.

Original languageEnglish (US)
Pages (from-to)3115-3153
Number of pages39
JournalAmerican Economic Review
Volume104
Issue number10
DOIs
StatePublished - Oct 1 2014
Externally publishedYes

ASJC Scopus subject areas

  • Economics and Econometrics

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