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...

We investigate the trade-off between the risk-sharing gains enjoyed by more interconnected firms and the costs resulting from an increased risk exposure. We find that when the shock distribution displays “fat” tails, extreme segmentation into small components is optimal, while minimal...

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...

This paper studies strategic savings and free-riding behaviours among ex- ante vulnerable firms in a fixed debt network under linear and quadratic default punishment structures. We specifically pay attention to networks without ex-ante default feedbacks. Results show Nash equilibrium are unique,...

The potential impact of interconnected financial institutions on interbank financial systems is a financial stability concern for central banks and regulators. In examining how financial shocks propagate through contagion effects, we argue that endogenous individual bank choices are necessary to...

The Great Depression is infamous for banking panics, which were a symptomatic of a phenomenon that scholars have labeled a contagion of fear. Using geocoded, microdata on bank distress, we develop metrics that illuminate the incidence of these events and how banks that remained in operation...

The potential impact of interconnected financial institutions on interbank financial systems is a financial stability concern for central banks and regulators. A number of algorithms/methods have been developed to extrapolate latent interbank risk exposures. However, most use highly stylized...