Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/107807
Authors: 
in 't Veld, Daan
van der Leij, Marco
Hommes, Cars
Year of Publication: 
2014
Series/Report no.: 
Tinbergen Institute Discussion Paper 14-098/II
Abstract: 
Recent empirical evidence suggests that financial networks exhibit a core periphery network structure. This paper aims at giving an economic explanation for the emergence of such a structure using network formation theory. Focusing on intermediation benefits, we find that a core periphery network cannot be unilaterally stable when agents are homogeneous. The best-response dynamics converge to a unique unilaterally stable outcome ranging from an empty to denser networks as the costs of linking decrease. A core periphery network structure can form endogenously, however, if we allow for heterogeneity among agents in size. We show that our model can reproduce the observed core periphery structure in the Dutch interbank market for reasonable parameter values.
Subjects: 
financial networks
core periphery structure
network formation models
JEL: 
D85
G21
L14
Document Type: 
Working Paper

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