printlogo
ETH Zuerich - Homepage
print   

Paper: ETH-RC-11-006

Title: Default Cascades: When Does Risk Diversification Increase Stability?

Authors: Stefano Battiston*, Domenico Delli Gatti, Mauro Gallegati, Bruce Greenwald, Joseph E. Stiglitz


Abstract:

We explore the dynamics of default cascades in a network of credit interlinkages in which each agent is at the same time a borrower and a lender. When some counterparties of an agent default, the loss she experiences amounts to her total exposure to those counterparties. A possible conjecture in this context is that individual risk diversification across more numerous counterparties should make also systemic defaults less likely. We show that this view is not always true. In particular, the diversification of credit risk across many borrowers has ambiguous effects on systemic risk in the presence of mechanisms of loss amplifications such as in the presence of potential runs among the short-term lenders of the agents in the network.


Keywords: Systemic risk, Network models, Contagion, Financial acceleration, Financial crises

Manuscript status: Submitted

JEL codes: D85, G01, G21
PACS numbers:



Local copy of the paper: ETH-RC-11-006.pdf


Submission date: 19-9-2011


Wichtiger Hinweis:
Diese Website wird in älteren Versionen von Netscape ohne graphische Elemente dargestellt. Die Funktionalität der Website ist aber trotzdem gewährleistet. Wenn Sie diese Website regelmässig benutzen, empfehlen wir Ihnen, auf Ihrem Computer einen aktuellen Browser zu installieren. Weitere Informationen finden Sie auf
folgender Seite.

Important Note:
The content in this site is accessible to any browser or Internet device, however, some graphics will display correctly only in the newer versions of Netscape. To get the most out of our site we suggest you upgrade to a newer browser.
More information