Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93597
Authors: 
Choi, Dong Beom
Year of Publication: 
2013
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 637
Abstract: 
This paper provides a model of systemic panic among financial institutions with heterogeneous fragilities. Concerns about potential spillovers from each other generate strategic interaction among institutions, triggering a preemption game in which one tries to exit the market before the others to avoid spillovers. Although financial contagion originates in weaker institutions, systemic risk depends critically on the financial health of stronger institutions in the contagion chain. This analysis suggests that when concerns about spillovers prevail, then 1) increasing heterogeneity of institutions promotes systemic stability and 2) bolstering the strong institutions in the contagion chain, rather than the weak, more effectively enhances systemic stability.
Subjects: 
financial spillovers
panic
financial crises
JEL: 
G00
G01
Document Type: 
Working Paper

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