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

Recent empirical evidence suggests that financial networks exhibit a core-periphery network structure. This paper aims at giving an explanation for the emergence of such a structure using network formation theory. We propose a general, stylized model of the interbank trading market, in which banks c...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2020-10, Vol.119, p.103972, Article 103972
Main Authors: in 't Veld, Daan, van der Leij, Marco, Hommes, Cars
Format: Article
Language:English
Subjects:
Core-periphery structure
Financial networks
Interbank market
Network formation models
Over-the-counter markets
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Summary:Recent empirical evidence suggests that financial networks exhibit a core-periphery network structure. This paper aims at giving an explanation for the emergence of such a structure using network formation theory. We propose a general, stylized model of the interbank trading 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.
ISSN:0165-1889
1879-1743
DOI:10.1016/j.jedc.2020.103972