Financial contagion in the laboratory: Does network structure matter?

John Duffy, Aikaterini Karadimitropoulou, Melanie Parravano

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14 Citations (Scopus)
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Abstract

We explore the role of interbank network structure and premature liquidation costs for the likelihood of financial contagions in a laboratory experiment. We consider complete versus incomplete networks of banks linked together by interbank deposits, and we further vary premature liquidation costs. Subjects play the role of depositors deciding whether or not to withdraw funds from their interconnected bank. We find that when liquidation costs are high, a complete network structure is significantly less vulnerable to financial contagions than an incomplete network structure. However, when liquidation costs are low, network structure is less important for the frequency of financial contagions.
Original languageEnglish
Pages (from-to)1097-1136
Number of pages40
JournalJournal of Money, Credit and Banking
Volume51
Issue number5
Early online date23 Oct 2018
DOIs
Publication statusPublished - Aug 2019

Keywords

  • Bank Runs
  • Contagion
  • Networks
  • Interbank Deposits
  • Financial Fragility
  • Experiments

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