Financial Networks and Contagion

39 Pages Posted: 10 Dec 2012 Last revised: 28 Nov 2022

See all articles by Matthew Elliott

Matthew Elliott

University of Cambridge

Benjamin Golub

Northwestern University

Matthew O. Jackson

Stanford University - Department of Economics; Santa Fe Institute

Date Written: January 1, 2014


We model contagions and cascades of failures among organizations linked through a network of financial interdependencies. We identify how the network propagates discontinuous changes in asset values triggered by failures (e.g., bankruptcies, defaults, and other insolvencies) and use that to study the consequences of integration (each organization becoming more dependent on its counterparties) and diversification (each organization interacting with a larger number of counterparties). Integration and diversification have different, nonmonotonic effects on the extent of cascades. Initial increases in diversification connect the network which permits cascades to propagate further, but eventually, more diversification makes contagion between any pair of organizations less likely as they become less dependent on each other. Integration also faces tradeoffs: increased dependence on other organizations versus less sensitivity to own investments. Finally, we illustrate some aspects of the model with data on European debt cross-holdings.

Keywords: financial networks, networks, contagion, cascades, financial crises, bankruptcy, diversification, integration, globalization

JEL Classification: G32, D85, G01, F36, G33, G38, F15

Suggested Citation

Elliott, Matthew and Golub, Benjamin and Jackson, Matthew O., Financial Networks and Contagion (January 1, 2014). Available at SSRN: or

Matthew Elliott

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Benjamin Golub

Northwestern University ( email )

Evanston, IL 60201
United States

Matthew O. Jackson (Contact Author)

Stanford University - Department of Economics ( email )

Landau Economics Building
579 Serra Mall
Stanford, CA 94305-6072
United States
1-650-723-3544 (Phone)


Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

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