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...

We develop a model where financial institutions form strategic connections through overlapping portfolio exposures weighing the benefits of risk diversification against the costs of due-diligence. We study the effects of different network structures for systemic risk and welfare depending on...

Financial crises have been pervasive phenomena throughout history. Bordo et al. (2001) find that their frequency in recent decades has been double that of the Bretton Woods Period (1945-1971) and the Gold Standard Era (1880-1993), comparable only to the Great Depression. Nevertheless, the...

Financial securities trade in a wide variety of market structures. This paper develops a theory in which both the market structure of trade and the payoffs of the claims being traded form endogenously. Financial intermediaries use the cash flows of an underlying asset to design securities for...

Modern banking systems are highly interconnected. Despite their various benefits, linkages between banks carry the risk of contagion. In this paper I investigate whether banks can commit ex-ante to mutually insure each other, when there is contagion risk in the financial system. I model banks'...

Modern financial systems exhibit a high degree of interdependence. There are different possible sources of connections between financial institutions, stemming from both the asset and the liability side of their balance sheet. For instance, banks are directly connected through mutual exposures...

We study the determinants of asset market fragmentation in a model with strategic investors that disagree about the value of an asset. Investors' choices determine the market structure. Fragmented markets are supported in equilibrium when disagreement between investors is low. In this case,...

We provide a theory of trading through intermediaries in over-the-counter markets. In our model, the role of intermediaries is to sustain unsecured trade. When agents borrow funds to invest in risky projects without pledging collateral, total surplus can increase. We propose a set-up in which...