The Formation of a Core-Periphery Structure in Heterogeneous Financial Networks

65 Pages Posted: 8 Nov 2016

See all articles by Marco van der Leij

Marco van der Leij

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

Daan in 't Veld

University of Amsterdam - Department of Quantitative Economics, CeNDEF

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: November 4, 2016

Abstract

Recent empirical evidence suggests that financial networks exhibit a core-periphery network structure. This paper aims at giving an explanation for the emergence of such a structure using network formation theory. We propose a simple model of the overnight interbank lending market, in which banks compete for intermediation benefits. Focusing on the role of bank heterogeneity, we find that a core-periphery network cannot be unilaterally stable when banks are homogeneous. A core-periphery network structure can form endogenously, however, if we allow for heterogeneity among banks in size. Moreover, size heterogeneity may arise endogenously if payoffs feed back into bank size.

Keywords: financial networks, core-periphery structure, network formation models, over-the-counter markets, interbank market

JEL Classification: D85, G21, L14

Suggested Citation

van der Leij, Marco Juri and in 't Veld, Daan and Hommes, Cars H., The Formation of a Core-Periphery Structure in Heterogeneous Financial Networks (November 4, 2016). De Nederlandsche Bank Working Paper No. 528. Available at SSRN: https://ssrn.com/abstract=2865666 or http://dx.doi.org/10.2139/ssrn.2865666

Marco Juri van der Leij (Contact Author)

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 )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

De Nederlandsche Bank - Research Department ( email )

P.O. Box 98
1000 AB Amsterdam
Netherlands

Daan In 't Veld

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

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

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

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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