Liquidity Hoarding in Financial Networks: The Role of Structural Uncertainty
The dynamics of confidence affect a plethora of financial phenomena including liquidity hoarding. We present a multiagent model of a financial network in which confidence dynamics are shaped by structural uncertainty—that is, the lack of knowledge about the network of interbank cross-exposures. Duri...
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doaj-06d56a5068f24f5c9fa7d7bb4f01e1c72020-11-25T01:17:56ZengHindawi-WileyComplexity1076-27871099-05262019-01-01201910.1155/2019/84365058436505Liquidity Hoarding in Financial Networks: The Role of Structural UncertaintyStojan Davidovic0Amit Kothiyal1Mirta Galesic2Konstantinos Katsikopoulos3Nimalan Arinaminpathy4Max Planck Institute for Human Development, Center for Adaptive Behavior and Cognition, Berlin, GermanyMax Planck Institute for Human Development, Center for Adaptive Behavior and Cognition, Berlin, GermanyMax Planck Institute for Human Development, Center for Adaptive Behavior and Cognition, Berlin, GermanyMax Planck Institute for Human Development, Center for Adaptive Behavior and Cognition, Berlin, GermanyFaculty of Medicine, School of Public Health, Imperial College London, London, UKThe dynamics of confidence affect a plethora of financial phenomena including liquidity hoarding. We present a multiagent model of a financial network in which confidence dynamics are shaped by structural uncertainty—that is, the lack of knowledge about the network of interbank cross-exposures. During a financial crisis, structural uncertainty makes it difficult for banks to assess the risk of financial contagion and their own health. Under such conditions, banks are more likely to behave conservatively and quickly act on information they receive from their local environment. A sudden financial shock, therefore, can be characterized by high-intensity local impact on confidence. We find that such local impacts quickly spread throughout the network, causing more damage than a shock that evenly affects all localities in the system; for example, a complete breakdown of the system occurs with a higher probability. The results are explained analytically by linking system performance to the speed of decrease in confidence.http://dx.doi.org/10.1155/2019/8436505 |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Stojan Davidovic Amit Kothiyal Mirta Galesic Konstantinos Katsikopoulos Nimalan Arinaminpathy |
spellingShingle |
Stojan Davidovic Amit Kothiyal Mirta Galesic Konstantinos Katsikopoulos Nimalan Arinaminpathy Liquidity Hoarding in Financial Networks: The Role of Structural Uncertainty Complexity |
author_facet |
Stojan Davidovic Amit Kothiyal Mirta Galesic Konstantinos Katsikopoulos Nimalan Arinaminpathy |
author_sort |
Stojan Davidovic |
title |
Liquidity Hoarding in Financial Networks: The Role of Structural Uncertainty |
title_short |
Liquidity Hoarding in Financial Networks: The Role of Structural Uncertainty |
title_full |
Liquidity Hoarding in Financial Networks: The Role of Structural Uncertainty |
title_fullStr |
Liquidity Hoarding in Financial Networks: The Role of Structural Uncertainty |
title_full_unstemmed |
Liquidity Hoarding in Financial Networks: The Role of Structural Uncertainty |
title_sort |
liquidity hoarding in financial networks: the role of structural uncertainty |
publisher |
Hindawi-Wiley |
series |
Complexity |
issn |
1076-2787 1099-0526 |
publishDate |
2019-01-01 |
description |
The dynamics of confidence affect a plethora of financial phenomena including liquidity hoarding. We present a multiagent model of a financial network in which confidence dynamics are shaped by structural uncertainty—that is, the lack of knowledge about the network of interbank cross-exposures. During a financial crisis, structural uncertainty makes it difficult for banks to assess the risk of financial contagion and their own health. Under such conditions, banks are more likely to behave conservatively and quickly act on information they receive from their local environment. A sudden financial shock, therefore, can be characterized by high-intensity local impact on confidence. We find that such local impacts quickly spread throughout the network, causing more damage than a shock that evenly affects all localities in the system; for example, a complete breakdown of the system occurs with a higher probability. The results are explained analytically by linking system performance to the speed of decrease in confidence. |
url |
http://dx.doi.org/10.1155/2019/8436505 |
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