Systemic risk and stability in financial networks

Daron Acemoglu*, Asuman Ozdaglar, Alireza Tahbaz-Salehi

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

390 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)564-608
Number of pages45
JournalAmerican Economic Review
Volume105
Issue number2
DOIs
StatePublished - Feb 1 2015

ASJC Scopus subject areas

  • Economics and Econometrics

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