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SUMMARY:Financial Networks and Contagion - Elliott\, M (CALTECH (Californi
 a Institute of Technology))
DTSTART:20140829T080000Z
DTEND:20140829T083000Z
UID:TALK53944@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:Joint with B. Golub and M. Jackson\n\nWe model financial conta
 gions and cascades of defaults among organizations that have a network of 
 cross holdings. We first identify a network-based measure that captures th
 e impact of changes in one organization's value on other organizations' va
 lues.  We use the measure to study both integration (the increasing of cro
 ss holdings) and diversification (the spreading out of cross holdings).  W
 e show that diversification initially increases the probability and extent
  of cascades as a network of interdependencies grows\, and eventually the 
 probability and extent of cascades decreases once organizations become les
 s tied to specific other organizations.  Integration also faces tradeoffs:
  increased dependence on other organizations versus less sensitivity to ow
 n investments. We briefly discuss incentives to seek bailouts\, and associ
 ated moral-hazard issues. We also show that once an organization approache
 s a bankruptcy threshold\, there are no trades of cross holdings or assets
  at fair prices that can lower the probability of its failure\, and that u
 nduly favorable trades for that organization and/or a direct injection of 
 capital are necessitated. Finally\, we illustrate some aspects of the mode
 l with European debt cross holdings.\n
LOCATION:Seminar Room 1\, Newton Institute
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