Contagion and Equilibria in Diversified Financial Networks

72 Pages Posted: 1 Dec 2021

See all articles by Victor Amelkin

Victor Amelkin

University of Pennsylvania; Amazon.com

Santosh Venkatesh

University of Pennsylvania - Department of Systems Engineering

Rakesh Vohra

University of Pennsylvania - Department of Economics

Date Written: November 30, 2021

Abstract

Diversified cross-shareholding networks are thought to be more resilient to shocks, but diversification also increases the channels by which a shock can spread. To resolve these competing intuitions we introduce a stochastic model of a diversified cross-shareholding network in which a firm’s valuation depends on its cash endowment and the shares it owns in other firms. We show that a concentration of measure phenomenon emerges: almost all realized network instances drawn from any probability distribution in a wide class are resilient to contagion if endowments are sufficiently large. Furthermore, the size of a shock needed to trigger widespread default increases with the exposure of firms to each other. Distributions in this class are characterized by the property that a firm’s equity shares owned by others are weakly dependent yet lack “dominant” shareholders.

Keywords: financial network, random network, contagion, systemic risk, equilibrium, dynamics, concentration of measure

Suggested Citation

Amelkin, Victor and Venkatesh, Santosh and Vohra, Rakesh, Contagion and Equilibria in Diversified Financial Networks (November 30, 2021). PIER Working Paper No. 21-029, Available at SSRN: https://ssrn.com/abstract=3974645 or http://dx.doi.org/10.2139/ssrn.3974645

Victor Amelkin

University of Pennsylvania ( email )

3401 Walnut St
#416B
Philadelphia, PA 19104
United States

HOME PAGE: http://victoramelkin.com

Amazon.com ( email )

HOME PAGE: http://victoramelkin.com

Santosh Venkatesh

University of Pennsylvania - Department of Systems Engineering ( email )

School of Engineering & Applied Science
3718 Locust Walk
Philadelphia, PA 19104
United States

Rakesh Vohra (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

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