Financial Networks and Contagion

We develop the network approach to financial interactions

Our focus covers three lines of research:

• The analysis of how investment by financial institutions interacts with the risk taking behaviour of these. It is expected that larger investments across firms, i.e., deeper financial integration, reduces volatility and raises welfare. However, it is well known that integration affects the risk taking behaviour, a rational for example to impose capital requirements on banks.
• A second line of research focuses on the interaction between banks and non-financial firms. We investigate how shocks to banks propagate through the economy via the input-output linkages in the non-financial economy. This is a new perspective to complement the existing literature that studies propagation within the financial network.
• The third line of research recognises that interconnectedness among financial institutions arises not only directly from mutual financial exposure, but also indirectly via their real investment portfolios. This is because there is a risk that these investments must be liquidated and absorbed by other financial institutions. When available liquidity is scarce relative to the volume of assets that need to be absorbed, these transactions happen at depressed fire-sale prices. This has two consequences: First, there is a redistribution of wealth from sellers to buyers. And second, provided financial institutions operate subject to binding collateral constraints, there is a pecuniary externality in that the anticipation of low revenue from fire-sale transactions constrains individually desired activities at an earlier stage.

View our list of members below and learn more about their individual research interests by visiting their staff profiles: