Exit Spirals in Coupled Networked Markets
Forthcoming in Operations Research
70 Pages Posted: 7 Dec 2016 Last revised: 9 Jan 2023
Date Written: January 6, 2023
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: Suggested Citation