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Working Paper
Intermediation in Networks
I study intermediation in networked markets using a stochastic model of multilateral bargaining in which players compete on different routes through the network. I characterize stationary equilibrium payoffs as the fixed point of a set of intuitive value function equations and study efficiency and the impact of network structure on payoffs. There is never too little trade but there may be an inefficiency through too much trade in states where delay would be efficient. With homogeneous trade surplus the payoffs for players that are not essential to a trade opportunity go to zero as trade ...
Working Paper
Collateralized Debt Networks with Lender Default
The Lehman Brothers' 2008 bankruptcy spread losses to its counterparties even when Lehman was a lender of cash, because collateral for that lending was tied up in the bankruptcy process. I study the implications of such lender default using a general equilibrium network model featuring endogenous leverage, endogenous asset prices, and endogenous network formation. The multiplex graph model has two channels of contagion: a counterparty channel of contagion and a price channel of contagion through endogenous collateral price. Borrowers diversify their lenders because of the counterparty risk, ...
Working Paper
Regulating Financial Networks Under Uncertainty
I study the problem of regulating a network of interdependent financial institutions that is prone to contagion when there is uncertainty regarding its precise structure. I show that such uncertainty reduces the scope for welfare-improving interventions. While improving network transparency potentially reduces this uncertainty, it does not always lead to welfare improvements. Under certain conditions, regulation that reduces the risk-taking incentives of a small set of institutions can improve welfare. The size and composition of such a set crucially depend on the interplay between (i) the ...
Report
Empirical network contagion for U.S. financial institutions
We construct an empirical measure of expected network spillovers that arise through default cascades for the U.S. financial system for the period 2002-16. Compared to existing studies, we include a much larger cross section of U.S. financial firms that comprises all bank holding companies, all broker-dealers, and all insurance companies, and consider their entire empirical balance sheet exposures instead of relying on simulations or on exposures arising just through one specific market (like the fed funds market) or one specific financial instrument (like credit default swaps). We find ...
Working Paper
A dynamic network model of the unsecured interbank lending market
The unsecured interbank lending market plays a crucial role in financing business activity, a fact underscored by the market's disruption following the Lehman Brothers failure in September 2008. This event, a defining moment in the global financial crisis, fostered greater uncertainty about counterparty risk, an adverse shock that severely curtailed credit supply, hampered monetary policy, and negatively impacted the real economy. To counteract the consequences of the crisis, central banks became the primary intermediaries for a large portion of the money market. However, a single main ...
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Precautionary Demand and Liquidity in Payment Systems
In large-value real-time gross settlement payment systems, banks rely heavily on incoming funds to finance outgoing payments. Such reliance necessitates a high degree of coordination and synchronization. We construct a model of a payment system calibrated for the U.S. Fedwire system and examine the impact of realistic disruptions motivated by the recent financial crisis. In such settings, individually cautious behavior can have a significant and detrimental impact on the overall functioning of the payment system through a multiplier effect. Our results quantify the mutually reinforcing nature ...