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Financial Contagion in Networks: A Market Experiment

Author

Listed:
  • Syngjoo Choi
  • Edoardo Gallo
  • Brian Wallace

Abstract

We investigate how the network structure of ?nancial linkages and uncer- tainty about the location of a shock a?ect the likelihood of contagion and the formation of prices in a double auction market experiment. Core-periphery networks are highly susceptible to contagion and generate ?re sales of assets that exacerbate ?nancial contagion beyond the mechanical role of network structure. In contrast, contagion is minimal on circle networks and market prices remain stable. Uncertainty on the location of the shock has little in?uence. The traders¡¯ comprehension level of the network-driven risk is predictive of their behavior and the likelihood of bankruptcy.

Suggested Citation

  • Syngjoo Choi & Edoardo Gallo & Brian Wallace, 2017. "Financial Contagion in Networks: A Market Experiment," Working Paper Series no124, Institute of Economic Research, Seoul National University.
    • Handle: RePEc:snu:ioerwp:no124
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    Citations

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    Cited by:

    1. Antinyan, Armenak & Horváth, Gergely & Jia, Mofei, 2020. "Positional concerns and social network structure: An experiment," European Economic Review, Elsevier, vol. 129(C).
    2. Davis, Douglas D. & Korenok, Oleg & Lightle, John P. & Prescott, Edward S., 2020. "Liquidity requirements and the interbank loan market: An experimental investigation," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 113-126.
    3. John Duffy & Aikaterini Karadimitropoulou & Melanie Parravano, 2019. "Financial Contagion in the Laboratory: Does Network Structure Matter?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(5), pages 1097-1136, August.
    4. Hanaki, Nobuyuki & Kayaba, Yutaka & Maekawa, Jun & Matsushima, Hitoshi, 2024. "Two experiments on trading information goods in a network," Games and Economic Behavior, Elsevier, vol. 145(C), pages 1-18.

    More about this item

    Keywords

    contagion; ?nancial network; experimental asset market;
    All these keywords.

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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