Exit Spirals in Coupled Networked Markets

70 Pages Posted: 7 Dec 2016 Last revised: 9 Jan 2023

See all articles by Christoph Aymanns

Christoph Aymanns

London School of Economics & Political Science (LSE) - London School of Economics; University of St. Gallen - School of Finance

Co-Pierre Georg

EDHEC Business School

Benjamin Golub

Northwestern University

Date Written: January 6, 2023

Abstract

Strategic agents choose whether to be active in networked markets. The value of being active depends on the activity choices of specific counterparties. Several markets are coupled when agents' participation decisions are complements across markets. We model the problem of an analyst assessing the robustness of coupled networked markets during a crisis—an exogenous negative payoff shock—based only on partial information about the network structure. We give conditions under which exit spirals emerge—abrupt collapses of activity following shocks. Market coupling is a pervasive cause of fragility, creating exit spirals even between networks that are individually robust. The robustness of a coupled network system can be improved if one of two markets is replaced by a centralized one, or if links become more correlated across markets.

Keywords: network games, fragility, macroprudential regulation, over-the-counter markets

JEL Classification: G21, G23, D85

Suggested Citation

Aymanns, Christoph and Georg, Co-Pierre and Golub, Benjamin, Exit Spirals in Coupled Networked Markets (January 6, 2023). Forthcoming in Operations Research, University of St.Gallen, School of Finance Research Paper No. 2018/10, Available at SSRN: https://ssrn.com/abstract=2881814 or http://dx.doi.org/10.2139/ssrn.2881814

Christoph Aymanns (Contact Author)

London School of Economics & Political Science (LSE) - London School of Economics ( email )

United Kingdom

University of St. Gallen - School of Finance

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

Co-Pierre Georg

EDHEC Business School ( email )

58 rue du Port
Lille, 59046
France

Benjamin Golub

Northwestern University ( email )

Evanston, IL 60201
United States

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