Pathways towards instability in financial networks
Marco Bardoscia1,2, Stefano Battiston1, Fabio Caccioli3,4
1Department of Banking and Finance, University of Zurich, 8032 Zurich, Switzerland.
Nature Communications
|February 22, 2017
Summary
Market integration and diversification, thought to stabilize financial systems, can paradoxically increase instability. Network topology reveals cyclical structures that amplify financial distress, increasing crisis likelihood.
Area of Science:
- Economics
- Network Science
- Financial Stability
Background:
- Financial crises share network structure similarities with ecosystem instability.
- Network topology's role in financial system instability is not fully understood.
- Existing models often focus on institutional interactions over network features.
Purpose of the Study:
- To investigate how network topology influences financial system instability.
- To determine if market integration and diversification impact systemic stability.
- To develop a general understanding of network-driven financial instability.
Main Methods:
- Network analysis of financial systems.
- Modeling the spread of financial distress.
- Abstracting interaction details to focus on topology.
Main Results:
- Market integration and diversification can create cyclical structures.
- These cyclical structures amplify financial distress.
- Instability arises from network topology, independent of interaction specifics.
Conclusions:
- Processes intended to stabilize can inadvertently increase systemic risk.
- Network topology is a critical factor in financial stability.
- Policy analysis can abstract network features for broader insights.
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