Game Theory & Math Economics: Matthew Elliott (Caltech) - "Endogenous Financial Networks: Efficient Modularity and Why Shareholders Prevent It" (joint work with Jonathon Hazell)

Topic: Endogenous Financial Networks: Efficient Modularity and Why Shareholders Prevent It (joint work with Jonathon Hazell) We consider systemic risk in financial networks, by examining the conflict of interest between debt- and equity-holders. Through trading, banks can diversify their idiosyncratic risks and avoid failures following small shocks. However, the resulting interdependencies can cause multiple failures after large shocks. A social planner resolves this trade-off by creating a modular network structure with fire breaks, thereby preventing failures from small shocks while containing contagion. Socially efficient networks favor debt-holders over equity holders, meaning equity-holders can profitably trade away from these networks. Moreover, profitable trades for equity holders align their counter-parties’ failures with their own, creating systemic risk. The full paper is here

Date: 

Sun, 08/05/2016 - 16:00 to 17:00

Location: 

Elath Hall, 2nd floor, Feldman Building, Edmond Safra Campus