The Formation of a Core Periphery Structure in Heterogeneous Financial Networks

Tinbergen Institute Discussion Paper 14-098/II

56 Pages Posted: 30 Jul 2014 Last revised: 22 Jun 2019

See all articles by Daan in 't Veld

Daan in 't Veld

University of Amsterdam - Department of Quantitative Economics, CeNDEF

Marco van der Leij

CeNDEF, University of Amsterdam; Tinbergen Institute; De Nederlandsche Bank - Research Department

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE); CeNDEF; Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: May 2, 2019

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.

Keywords: financial networks, core periphery structure, network formation models

JEL Classification: D85, G21, L14

Suggested Citation

in 't Veld, Daan and van der Leij, Marco Juri and Hommes, Cars H., The Formation of a Core Periphery Structure in Heterogeneous Financial Networks (May 2, 2019). Tinbergen Institute Discussion Paper 14-098/II. Available at SSRN: https://ssrn.com/abstract=2473131 or http://dx.doi.org/10.2139/ssrn.2473131

Daan In 't Veld (Contact Author)

University of Amsterdam - Department of Quantitative Economics, CeNDEF ( email )

Spui 21
Amsterdam, 1018 WB
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+31 20 525 4335 (Phone)

HOME PAGE: http://www1.fee.uva.nl/cendef/whoiswho/showHP/default.asp?pID=99&selected=pi

Marco Juri van der Leij

CeNDEF, University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands
+31 20 525 7356 (Phone)

HOME PAGE: http://home.staff.uva.nl/m.j.vanderleij

Tinbergen Institute ( email )

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Rotterdam, 3062 PA
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De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Center for Nonlinear Dynamics in Economics and Finance
1018 WB Amsterdam
Netherlands
+31 20 525 4246 (Phone)
+31 20 525 4349 (Fax)

CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/cendef/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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