%0 Journal Article %1 Battiston2009Liaisons %A Battiston, Stefano %A Delli Gatti, Domenico %A Gallegati, Mauro %A Greenwald, Bruce C. %A Stiglitz, Joseph E. %D 2009 %J National Bureau of Economic Research Working Paper Series %K systemic-risk financial-networks %P 15611+ %T Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk %U http://www.nber.org/papers/w15611 %X Author contact info: Stefano Battiston Chair of Systems Design, ETH Zurich KPL F27.2, Kreuzplatz 5 CH-8032 Zurich SWITZERLAND E-Mail: sbattiston@ethz.ch Domenico Delli Gatti Istituto di Teoria Economica Università Cattolica Largo Gemelli, 1 20123 Milano E-Mail: domenico.delligatti@unicatt.it Mauro Gallegati Dipartimento di Economia Facolta' di Economia Giorgio Fua' Universita' Politecnica delle Marche Piazzale Martelli, 8 60121 Ancona E-Mail: mauro.gallegati@univpm.it Bruce C. Greenwald Columbia University 611 Uris Hall New York, NY 10027 E-Mail: bg7@columbia.edu Joseph E. Stiglitz Uris Hall, Columbia University 3022 Broadway, Room 814 New York, NY 10027 Tel: 212/854-0671 Fax: 212/662-8474 E-Mail: jes322@columbia.edu We characterize the evolution over time of a network of credit relations among financial agents as a system of coupled stochastic processes. Each process describes the dynamics of individual financial robustness, while the coupling results from a network of liabilities among agents. The average level of risk diversification of the agents coincides with the density of links in the network. In addition to a process of diffusion of financial distress, we also consider a discrete process of default cascade, due to the re-evaluation of agents' assets. In this framework we investigate the probability of individual defaults as well as the probability of systemic default as a function of the network density. While it is usually thought that diversification of risk always leads to a more stable financial system, in our model a tension emerges between individual risk and systemic risk. As the number of counterparties in the credit network increases beyond a certain value, the default probability, both individual and systemic, starts to increase. This tension originates from the fact that agents are subject to a financial accelerator mechanism. In other words, individual financial fragility feeding back on itself may amplify the effect of an initial shock and lead to a full fledged systemic crisis. The results offer a simple possible explanation for the endogenous emergence of systemic risk in a credit network.

@article{Battiston2009Liaisons, abstract = {{Author contact info: Stefano Battiston Chair of Systems Design, ETH Zurich KPL F27.2, Kreuzplatz 5 CH-8032 Zurich SWITZERLAND E-Mail: sbattiston@ethz.ch Domenico Delli Gatti Istituto di Teoria Economica Universit\`{a} Cattolica Largo Gemelli, 1 20123 Milano E-Mail: domenico.delligatti@unicatt.it Mauro Gallegati Dipartimento di Economia Facolta' di Economia Giorgio Fua' Universita' Politecnica delle Marche Piazzale Martelli, 8 60121 Ancona E-Mail: mauro.gallegati@univpm.it Bruce C. Greenwald Columbia University 611 Uris Hall New York, NY 10027 E-Mail: bg7@columbia.edu Joseph E. Stiglitz Uris Hall, Columbia University 3022 Broadway, Room 814 New York, NY 10027 Tel: 212/854-0671 Fax: 212/662-8474 E-Mail: jes322@columbia.edu We characterize the evolution over time of a network of credit relations among financial agents as a system of coupled stochastic processes. Each process describes the dynamics of individual financial robustness, while the coupling results from a network of liabilities among agents. The average level of risk diversification of the agents coincides with the density of links in the network. In addition to a process of diffusion of financial distress, we also consider a discrete process of default cascade, due to the re-evaluation of agents' assets. In this framework we investigate the probability of individual defaults as well as the probability of systemic default as a function of the network density. While it is usually thought that diversification of risk always leads to a more stable financial system, in our model a tension emerges between individual risk and systemic risk. As the number of counterparties in the credit network increases beyond a certain value, the default probability, both individual and systemic, starts to increase. This tension originates from the fact that agents are subject to a financial accelerator mechanism. In other words, individual financial fragility feeding back on itself may amplify the effect of an initial shock and lead to a full fledged systemic crisis. The results offer a simple possible explanation for the endogenous emergence of systemic risk in a credit network.}}, added-at = {2019-06-10T14:53:09.000+0200}, author = {Battiston, Stefano and Delli Gatti, Domenico and Gallegati, Mauro and Greenwald, Bruce C. and Stiglitz, Joseph E.}, biburl = {https://www.bibsonomy.org/bibtex/2428ba457cbde8df966d8ade4f6eb2499/nonancourt}, citeulike-article-id = {9637506}, citeulike-linkout-0 = {http://www.nber.org/papers/w15611}, citeulike-linkout-1 = {http://www.nber.org/papers/w15611.pdf}, interhash = {7f071cbf47a18606fd59176714f4c9b8}, intrahash = {428ba457cbde8df966d8ade4f6eb2499}, journal = {National Bureau of Economic Research Working Paper Series}, keywords = {systemic-risk financial-networks}, month = jan, pages = {15611+}, posted-at = {2011-08-09 20:12:09}, priority = {2}, timestamp = {2019-07-31T12:33:18.000+0200}, title = {{Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk}}, url = {http://www.nber.org/papers/w15611}, year = 2009 }