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NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Ana Babus

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July 2010Financial Connections and Systemic Risk
with Franklin Allen, Elena Carletti: w16177
We develop a model where institutions form connections through swaps of projects in order to diversify their individual risk. These connections lead to two different network structures. In a clustered network groups of financial institutions hold identical portfolios and default together. In an unclustered network defaults are more dispersed. With long term finance welfare is the same in both networks. In contrast, when short term finance is used, the network structure matters. Upon the arrival of a signal about banks' future defaults, investors update their expectations of bank solvency. If their expectations are low, they do not roll over the debt and there is systemic risk in that all institutions are early liquidated. We compare investors' rollover decisions and welfare in the two net...

Published: Financial Connections and Systemic Risk, Franklin Allen, Ana Babus, Elena Carletti. in Market Institutions and Financial Market Risk, Carey, Kashyap, Rajan, and Stulz. 2012

June 2010Financial Connections and Systemic Risk
with Franklin Allen, Elena Carletti
in Market Institutions and Financial Market Risk, Mark Carey, Anil Kashyap, Raghuram Rajan, and René Stulz, organizers

Contact and additional information for this authorAll NBER papers and publicationsNBER Working Papers only

 
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