Financial Contagion in Networks: A Market Experiment

73 Pages Posted: 5 Jul 2017 Last revised: 15 Nov 2017

See all articles by Syngjoo Choi

Syngjoo Choi

Seoul National University

Edoardo Gallo

University of Cambridge

Brian Wallace

University College London - Centre for Economic Learning and Social Evolution (ELSE)

Date Written: June 27, 2017

Abstract

We investigate how the network structure of financial linkages and uncertainty about the location of a shock affect the likelihood of contagion and the formation of prices in a double auction market experiment. Core-periphery networks are highly susceptible to contagion and generate fire sales of assets that exacerbate financial contagion beyond the mechanical role of network structure. In contrast, contagion is minimal on circle networks and market prices remain stable. Uncertainty on the location of the shock has little influence. The traders' comprehension level of the network-driven risk is predictive of their behavior and the likelihood of bankruptcy.

Keywords: contagion, financial network, experimental asset market

JEL Classification: C92, D40, D85, L14

Suggested Citation

Choi, Syngjoo and Gallo, Edoardo and Wallace, Brian, Financial Contagion in Networks: A Market Experiment (June 27, 2017). Available at SSRN: https://ssrn.com/abstract=2995918 or http://dx.doi.org/10.2139/ssrn.2995918

Syngjoo Choi

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Edoardo Gallo (Contact Author)

University of Cambridge ( email )

Trinity Ln
Cambridge, CB2 1TN
United Kingdom

Brian Wallace

University College London - Centre for Economic Learning and Social Evolution (ELSE) ( email )

Gower Street
London WC1E 6BT
United Kingdom

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