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Financial Contagion in the Laboratory: Does Network Structure Matter?

Lookup NU author(s): Dr Melanie Parravano Baro

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This is the authors' accepted manuscript of an article that has been published in its final definitive form by Wiley, 2019.

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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.

Publication metadata

Author(s): Duffy J, Karadimitropoulou A, Parravano M

Publication type: Article

Publication status: Published

Journal: Journal of Money, Credit, and Banking

Year: 2019

Volume: 51

Issue: 5

Pages: 1097-1136

Print publication date: 01/08/2019

Online publication date: 23/10/2018

Acceptance date: 15/08/2018

Date deposited: 23/11/2018

ISSN (print): 0022-2879

ISSN (electronic): 1538-4616

Publisher: Wiley

URL: https://doi.org/10.1111/jmcb.12563

DOI: 10.1111/jmcb.12563

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