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Discussion Paper
Assessing Contagion Risk in a Financial Network
Since the 2008 financial crisis, there has been an explosion of research trying to understand and quantify the default spillovers that can arise through counterparty risk. This first of two posts delves into the analysis of financial network contagion through this spillover channel. The authors introduce a framework, originally developed by Eisenberg and Noe, that is useful for thinking about default cascades.
Working Paper
Parental Proximity and Earnings after Job Displacements
Young adults, ages 25 to 35, who live in the same neighborhoods as their parents experience stronger earnings recoveries after a job displacement than those who live farther away. This result is driven by smaller on-impact wage reductions and sharper recoveries in both hours and wages. We show that geographic mobility, different job search durations, housing transfers, and ex-ante differences between individuals are unlikely explanations. Our findings are consistent with a framework in which some individuals living near their parents face a better wage-offer distribution, though we find no ...
Working Paper
Global Trade and GDP Co-Movement
We revisit the association between trade and GDP comovement for 135 countries from 1970 to 2009. Guided by a simple theory, we introduce two notions of trade linkages: (i) the usual direct bilateral trade index and (ii) new indexes of common exposure to third countries capturing the role of similarity in trade networks. Both measures are economically and statistically associated with GDP correlation, suggesting an additional channel through which GDP fluctuations propagate through trade linkages. Moreover, high income countries become more synchronized when the content of their trade is ...
Working Paper
The Role of Interbank Relationships and Liquidity Needs
In this paper, we focus on the interconnectedness of banks and the price they pay for liquidity. We assess how the concentration of credit relationships and the position of a bank in the network topology of the system influence the bank?s ability to meet its liquidity demand. We use quarterly data of bilateral interbank credit exposures between all German banks from 2000 to 2008 to measure interbank relationships and the network characteristics. We match these data with the bids placed by the individual banks in the European Central Bank?s (ECB) weekly repo auctions. The bids measure each ...
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
Making Friends Meet: Network Formation with Introductions
High levels of clustering—the tendency for two nodes in a network to share a neighbor—are ubiquitous in economic and social networks across different applications. In addition, many real-world networks show high payoffs for nodes that connect otherwise separate network regions, representing rewards for filling “structural holes” in the sense of Burt (1992) and keeping distances in networks short. This paper proposes a parsimonious model of network formation with introductions and intermediation rents that can explain both these features. Introductions make it cheaper to create ...
Working Paper
Value Added and Productivity Linkages Across Countries
What is the relationship between international trade and business cycle synchronization? Using data from 40 countries, we find that GDP comovement is significantly associated with trade in intermediate inputs but not with trade in final goods. Motivated by this new fact, we build a model of international trade that is able to replicate the empirical trade-comovement slope, offering the first quantitative solution for the Trade Comovement Puzzle. The model relies on (i) global value chains, (ii) price distortions due to monopolistic competition and (iii) fluctuations in the mass of firms ...
Report
When It Rains, It Pours: Cyber Risk and Financial Conditions
We analyze how systemic cyber risk relates to the financial cycle and show that the potential impact of a cyber attack is systematically greater during stressed financial conditions. This is true over the past two decades and particularly at the onset of the COVID-19 pandemic, when changes in payment activity increased vulnerability by approximately 50 percent relative to the rest of 2020 through more concentration and intraday liquidity stress. We evaluate the effectiveness of policy interventions used to stabilize markets at mitigating cyber vulnerability. We argue that cyber and other ...
Report
Do informal referrals lead to better matches? Evidence from a firm's employee referral system
The limited nature of data on employment referrals in large business and household surveys has so far limited our understanding of the relationships among employment referrals, match quality, wage trajectories, and turnover. Using a new, firm-level data set that includes explicit information on whether a worker was referred by a current employee of the company, we are able to provide rich detail on these empirical relationships for a single U.S. corporation, and to test various predictions of theoretical models of labor market referrals. Predictions with which our results align include: 1) ...
Working Paper
Making Friends Meet: Network Formation with Introductions
This paper proposes a parsimonious model of network formation with introductions in the presence of intermediation rents. Introductions allow two nodes to form a new connection on favorable terms with the help of a common neighbor. The decision to form links via introductions is subject to a trade-off between the gains from having a direct connection at lower cost and the potential losses for the introducer from lower intermediation rents. When nodes take advantage of introductions, stable networks tend to exhibit a minimum of clustering. At the same time, intermediary nodes have incentives ...