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Contagion and equilibria in diversified financial networks

Author

Listed:
  • Amelkin, Victor
  • Venkatesh, Santosh
  • Vohra, Rakesh

Abstract

Diversified cross-shareholding networks are thought to be more resilient to shocks, but diversification also increases the channels by which a shock can spread. To resolve these competing intuitions we introduce a stochastic model of a diversified cross-shareholding network in which a firm's valuation depends on its cash endowment and the shares it owns in other firms. We show that a concentration of measure phenomenon emerges: almost all realized network instances drawn from any probability distribution in a wide class are resilient to contagion if endowments are sufficiently large. Furthermore, the size of a shock needed to trigger widespread financial distress increases with the exposure of firms to each other. Distributions in this class are characterized by the property that a firm's equity shares owned by others are weakly dependent yet lack “dominant” shareholders.

Suggested Citation

  • Amelkin, Victor & Venkatesh, Santosh & Vohra, Rakesh, 2024. "Contagion and equilibria in diversified financial networks," Journal of Economic Theory, Elsevier, vol. 217(C).
    • Handle: RePEc:eee:jetheo:v:217:y:2024:i:c:s0022053124000255
    DOI: 10.1016/j.jet.2024.105819
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    References listed on IDEAS

    as
    1. Yann Bramoull? & Rachel Kranton & Martin D'Amours, 2014. "Strategic Interaction and Networks," American Economic Review, American Economic Association, vol. 104(3), pages 898-930, March.
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    4. Echenique, Federico, 2007. "Finding all equilibria in games of strategic complements," Journal of Economic Theory, Elsevier, vol. 135(1), pages 514-532, July.
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    6. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Financial network; Random network; Systemic risk; Equilibrium; Dynamics; Concentration of measure;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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