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The price of complexity in financial networks

Battiston, Stefano and Caldarelli, Guido and May, Robert M. and Roukny, Tarik and Stiglitz, Joseph E. The price of complexity in financial networks. Proceedings of the National Academy of Sciences, 113 (36). pp. 10031-10036. ISSN 1091-6490 (2016)

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Financial institutions form multilayer networks by engaging in contracts with each other and by holding exposures to common assets. As a result, the default probability of one institution depends on the default probability of all of the other institutions in the network. Here, we show how small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults. From the point of view of financial regulators, our findings show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises.

Item Type: Article
Identification Number: 10.1073/pnas.1521573113
Additional Information: SCOPUS ID: 2-s2.0-8498632199
Projects: FET project SIMPOL (nr. 610704), FET Project DOLFINS (nr. 640772), FET IP Project MULTIPLEX (nr. 317532), SoBigData (nr.654024)
Uncontrolled Keywords: Financial contagion, Financial networks, Complexity, Default probability, Systemic risk
Subjects: Q Science > QC Physics
Research Area: Computer Science and Applications
Depositing User: Caterina Tangheroni
Date Deposited: 04 Oct 2016 10:57
Last Modified: 04 Oct 2016 11:02
URI: http://eprints.imtlucca.it/id/eprint/3552

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