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Pathways towards instability in financial networks

Bardoscia, Marco and Battiston, Stefano and Caccioli, Fabio and Caldarelli, Guido (2017) Pathways towards instability in financial networks. Nature Communications, 8 (14416). ISSN 0028-0836

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Identification Number: 10.1038/ncomms14416

Abstract

Following the financial crisis of 2007–2008, a deep analogy between the origins of instability in financial systems and complex ecosystems has been pointed out: in both cases, topological features of network structures influence how easily distress can spread within the system. However, in financial network models, the details of how financial institutions interact typically play a decisive role, and a general understanding of precisely how network topology creates instability remains lacking. Here we show how processes that are widely believed to stabilize the financial system, that is, market integration and diversification, can actually drive it towards instability, as they contribute to create cyclical structures which tend to amplify financial distress, thereby undermining systemic stability and making large crises more likely. This result holds irrespective of the details of how institutions interact, showing that policy-relevant analysis of the factors affecting financial stability can be carried out while abstracting away from such details.

Item Type: Article
Official URL: http://www.nature.com/ncomms
Additional Information: © 2017 The Authors © CC BY 4.0
Subjects: H Social Sciences > HG Finance
Q Science > QA Mathematics
Sets: Research centres and groups > Systemic Risk Centre
Date Deposited: 21 Mar 2017 09:20
Last Modified: 25 Sep 2017 07:43
URI: http://eprints.lse.ac.uk/id/eprint/69904

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