← Search

American Economic Review Vol. 105 No. 2 2015

Systemic Risk and Stability in Financial Networks

Daron Acemoglu1; Asuman Ozdaglar2; Alireza Tahbaz-Salehi3

1 Department of Economics, Massachusetts Institute of Technology, 77 Massachusetts Avenue, E18-269D, Cambridge, MA 02142 (e-mail: ) · 2 Laboratory for Information and Decision Systems, Massachusetts Institute of Technology, 77 Massachusetts Avenue, 32-D630, Cambridge, MA 02139-4307 (e-mail: ) · 3 Columbia Business School, Columbia University, 3022 Broadway, Uris Hall 418, New York, NY 10027 (e-mail: )

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.

DOI
10.1257/aer.20130456
Volume
105
Issue
2
Pages
564-608
Language
en
Sources
openalex crossref bibtex:phds-export.bib

Cite