Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2014-07-28
Revision-Date: 2019-05-02
Number: 14-098/II
Author-Name: Marco van der Leij
Author-Workplace-Name: University of Amsterdam, De Nederlandsche Bank, the Netherlands
Author-Name: Daan in 't Veld
Author-Workplace-Name: University of Amsterdam, the Netherlands
Author-Name: Cars Hommes
Author-Workplace-Name: University of Amsterdam, the Netherlands
Title: The Formation of a Core Periphery Structure in Heterogeneous Financial Networks
Abstract: Recent empirical evidence suggests that financial networks exhibit a core-periphery network structure. This paper aims at giving an explanation for the emergence of such a structure using network formation theory. We propose a simple model of the overnight interbank lending market, in which banks compete for intermediation benefits. Focusing on the role of bank heterogeneity, we find that a core-periphery network cannot be unilaterally stable when banks are homogeneous. A core-periphery network structure can form endogenously, however, if we allow for heterogeneity among banks in size. Moreover, size heterogeneity may arise endogenously if payoffs feed back into bank size.
Classification-JEL: D85, G21, L14
Keywords: financial networks, core periphery structure, network formation models, over-the-counter markets, interbank market
File-Url: https://papers.tinbergen.nl/14098.pdf
File-Format: application/pdf
File-Size: 778679 bytes
Handle: RePEc:tin:wpaper:20140098