When banks choose similar investment strategies, the financial system becomes vulnerable to common shocks. Banks decide about their investment strategy ex-ante based on a private belief about the state of the world and a social belief formed from observing the actions of peers. When the social...

The breakdown of short-term funding markets was a key feature of the global financial crisis of 2007/8. Combining insights from the literature on global games and network growth, we develop a simple model that sheds light on how network topology interacts with the funding structure of financial...

Interconnectedness is an inherent feature of the modern financial system. While it contributes to efficiency of financial services, it also creates structural vulnerabilities: pernicious shock transmission and amplification impacting banks' capitalization. This has recently been seen during the...

Alongside other non-bank financial intermediaries, open-ended funds that invest in bonds ("bond OEFs") have grown rapidly over the past two decades. Besides their size, their business model and role in recent events suggest that bond OEFs can amplify stress in financial markets. The March 2020...

The breakdown of short-term funding markets was a key feature of the global financial crisis of 2007/8. Combining insights from the literature on global games and network growth, we develop a simple model that sheds light on how network topology interacts with the funding structure of financial...

I study macro-prudential policy intervention in economies with secularly low interest rates. Intervention boosts risk-free real interest rates unintentionally, simply as a by-product of containing systemic risk in financial markets. Thus, intervention also boosts the natural rate of return in...

Interbank borrowing and lending may induce systemic risk into financial markets. A simple model of this is to assume that log-monetary reserves are coupled, and that banks can also borrow/lend from/to a central bank. When all banks optimize their cost of borrowing and lending, this leads to a...

This paper proposes a novel regulatory framework for financial interconnectedness and introduces a new concept: “self-contained networks”. In networks where each bank is too costly for other banks to let fail, banks endogenously rescue each other. Such networks are self-contained since they...

This paper investigates a model of default in financial networks where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and...