Untying Interconnectedness: Topology, Stability and the Post-crisis Reforms
16 Pages Posted: 27 Apr 2020
Date Written: April 1, 2020
‘Interconnectedness’ was considered to be a cause of the 2008 financial crisis, stimulating a number of studies into the topology of financial markets. Yet the analysis of instability within networks has tended to focus on a type of ‘contagion’ which imagines serial insolvencies, with non-performance of due obligations causing solvency issues for connected institutions. A more realistic assessment of the 2008 crisis was that it was due to a drying-up of available cash. A taxonomy of contagion is proposed, and the illiquidity model of contagion is then analyzed with reference to the observed core-periphery structure of financial market networks. Finally, the post-crisis reforms are judged against the view of ‘interconnectedness’ which emerges.
Keywords: Interconnectedness, network, 2008 crisis, liquidity, clearing
JEL Classification: D53, D85, G21, G33
Suggested Citation: Suggested Citation