Systemic Risk and Stability in Financial Networks

By Daron Acemoglu, Asuman E. Ozdaglar, Alireza Tahbaz-Salehi. 2015

1,945 citations recorded by the source corpus.

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. (JEL D85, E44, G21, G28, L14)

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/79a3485033aa127569cdeaa562de41934482e605

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Citations in the corpus

How connected is the global sovereign credit risk network? (2020, positive): “Acemoglu et al. (2015) show that one is more likely to observe within-cluster contagion in networks where there are multiple clusters (local communities) in which the members are strongly connected with each other and relatively less connected with the members of other clusters.”
A network analysis of the volatility of high dimensional financial series (2017, background): “That type of networkbased analysis is of particular relevance in financial econometrics—see, among others, Billio et al. (2012), Acemoglu et al. (2015), Hautsch et al. (2014, 2015) or Diebold and Yilmaz (2014).”
Transmission channels of systemic risk and contagion in the European financial network (2015, neutral): “(2014) and Acemoglu et al. (2015) explode how a propagation of shocks in banking networks and the extent of interbank connectivity increase systemic failures due to contagion of counterparty risk.”
Where the Risks Lie: A Survey on Systemic Risk (2017, positive): “Important results in this literature include, for instance, the idea that networks are “robust yet fragile” (Gai and Kapadia, 2010, see also Acemoglu, Ozdaglar, and Tahbaz-Salehi, 2015): connected networks, in which all institutions are connected to each other (at least indirectly) are more robust…”
Production Networks: A Primer (2019, background): “The transformation ãij = γaij + (1 − γ)(1− α)/n coincides with the concept of γ-convex combination of two networks in Acemoglu et al. (2015). variance-covariance matrix.”
Too Interconnected to Fail: A Survey of the Interbank Networks Literature (2015, background): “A recent study by Acemoglu et al. (2015) tries to reconcile these differing perspectives by looking at phase transitions depending on connectivity and shock size. Focusing on regular financial networks28, Acemoglu et al. (2015) show that when the magnitude and the number of negative shocks are below”
An Overview of Macroprudential Policy Tools (2014, neutral): “Financial institutions can reduce but not entirely eliminate these risks as interconnectedness is often beyond their individual control and actors do not internalize their implications for systemic risk (Acemoglu et al., 2013).”
Elimination of systemic risk in financial networks by means of a systemic risk transaction tax (2014, background): “SR is a network externality resulting from contagion effects (Acemoglu et al. 2013).”
Quantile Connectedness: Modelling Tail Behaviour in the Topology of Financial Networks (2018, positive): “Consequently, for ease of interpretation, we follow Acemoglu et al. (2012) and report empirical counter cumulative distribution functions (CCDFs) on a logarithmic scale in Figure 2.”
Networks, Shocks, and Systemic Risk (2015, positive): “The first, which is our own work (Acemoglu, Ozdaglar, and Tahbaz-Salehi, 2015b), considers a network of banks linked through unsecured debt obligations and studies the emergence of financial cascades resulting from terparty risk.”