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Financial stability and network complexity: A random matrix approach

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  • Li, Fei
  • Kang, Hao
  • Xu, Jingfeng

Abstract

This paper develops a network model having random matrices to explore the effects of network complexity on financial stability. We provide the stability criterion and show that too rich a network connectivity or larger network size can cause instability. This reveals a new insight that the rapid financial growth will lose stability if network connectivity and size are not balanced. We also find that increasing competitive interactions within the network can enhance the stability, and the network size can affect such effect on stability. Our results carry potentially far-reaching implications for the implementation of regulation policy.

Suggested Citation

  • Li, Fei & Kang, Hao & Xu, Jingfeng, 2022. "Financial stability and network complexity: A random matrix approach," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 177-185.
    • Handle: RePEc:eee:reveco:v:80:y:2022:i:c:p:177-185
    DOI: 10.1016/j.iref.2022.02.050
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    Cited by:

    1. Hałaj, Grzegorz & Martinez-Jaramillo, Serafin & Battiston, Stefano, 2024. "Financial stability through the lens of complex systems," Journal of Financial Stability, Elsevier, vol. 71(C).
    2. Radu LUPU & Iulia LUPU & Tanase STAMULE & Mihai ROMAN, 2022. "Entropy as Leading Indicator for Extreme Systemic Risk Events," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 58-73, December.

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    More about this item

    Keywords

    Stability criterion; Random matrix; Network complexity; Co-opetition pattern;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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