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Co-Pierre Georg

28 July 2014
WORKING PAPER SERIES - No. 1700
Details
Abstract
When banks choose similar investment strategies, the financial system becomes vulnerable to common shocks. Banks decide about their investment strategy ex-ante based on a private belief about the state of the world and a social belief formed from observing the actions of peers. When the social belief is strong and the financial network is fragmented, banks follow their peers and their investment strategies synchronize. This effect is stronger for less informative private signals. For endogenously formed interbank networks, however, less informative signals lead to higher network density and less synchronization. It is shown that the former effect dominates the latter.
JEL Code
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
C73 : Mathematical and Quantitative Methods→Game Theory and Bargaining Theory→Stochastic and Dynamic Games, Evolutionary Games, Repeated Games
D53 : Microeconomics→General Equilibrium and Disequilibrium→Financial Markets
D85 : Microeconomics→Information, Knowledge, and Uncertainty→Network Formation and Analysis: Theory
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ECB Lamfalussy Fellowship Programme