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Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, and Systemic Risk

Stiglitz, Joseph E.; Greenwald, Bruce C.; Battiston, Stefano; Delli Gatti, Domenico; Gallegati, Mauro

The recent financial crisis poses the challenge to understand how systemic risk arises endogenously and what architecture can make the financial system more resilient to global crises. This paper shows that a financial network can be most resilient for intermediate levels of risk diversification, and not when this is maximal, as generally thought so far. This finding holds in the presence of the financial accelerator, i.e. when negative variations in the financial robustness of an agent tend to persist in time because they have adverse effects on the agent's subsequent performance through the reaction of the agent's counterparties.

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Title
Journal of Economic Dynamics and Control
DOI
https://doi.org/10.1016/j.jedc.2012.04.001

More About This Work

Academic Units
Economics
Published Here
March 25, 2013
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