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04 november 2016 Onderzoek Toezichtlabel Working Papers

Recent empirical evidence suggests that financial networks exhibit a core-periphery net- work structure.  This paper aims at giving an explanation for the emergence of such a structure using network formation theory. We  propose a simple model of the overnight interbank lending market, in which banks compete for intermediation benefits. Focusing on the role of bank heterogeneity, we find that a core-periphery network cannot be unilaterally stable when banks are homogeneous. A core-periphery network structure can form endogenously, however, if we allow for heterogeneity among banks in size. Moreover, size heterogeneity may arise endogenously if payoffs feed back into bank size.
 
Keywords: financial networks, core-periphery structure, network formation models, over-the-counter markets, interbank market.
JEL classifications: D85, G21, L14.

Working paper no. 528.

528 - The formation of a core-periphery structure in heterogeneous financial networks

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authors

  • Marco van der Leij
  • Daan in ’t Veld
  • Cars Hommes