Financial Connections and Systemic Risk

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dc.contributor.author ALLEN, Franklin
dc.contributor.author BABUS, Ana
dc.contributor.author CARLETTI, Elena
dc.date.accessioned 2010-07-06T12:29:42Z
dc.date.available 2010-07-06T12:29:42Z
dc.date.issued 2010
dc.identifier.issn 1725-6704
dc.identifier.uri http://hdl.handle.net/1814/14256
dc.description This Working Paper (EUI ECO 2010/30) is a revised version of EUI ECO Working Paper 2010/26. en
dc.description.abstract We develop a model where institutions form connections through swaps of projects in order to diversify their individual risk. These connections lead to two different network structures. In a clustered network groups of financial institutions hold identical portfolios and default together. In an unclustered network defaults are more dispersed. With long term finance welfare is the same in both networks. In contrast, when short term finance is used, the network structure matters. Upon the arrival of a signal about banks’ future defaults, investors update their expectations of bank solvency. If their expectations are low, they do not roll over the debt and there is systemic risk in that all institutions are early liquidated. We compare investors’ rollover decisions and welfare in the two networks. en
dc.language.iso en en
dc.relation.ispartofseries EUI ECO en
dc.relation.ispartofseries 2010/30 en
dc.title Financial Connections and Systemic Risk en
dc.type Working Paper en
dc.neeo.contributor ALLEN|Franklin|aut|
dc.neeo.contributor BABUS|Ana|aut|
dc.neeo.contributor CARLETTI|Elena|aut|EUI70001
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