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Liquidity hoarding in financial networks: The role of structural uncertainty

Liquidity hoarding in financial networks: The role of structural uncertainty
Liquidity hoarding in financial networks: The role of structural uncertainty

The dynamics of confidence affect a plethora of financial phenomena including liquidity hoarding. We present a multiagent model of a financial network in which confidence dynamics are shaped by structural uncertainty—that is, the lack of knowledge about the network of interbank cross-exposures. During a financial crisis, structural uncertainty makes it difficult for banks to assess the risk of financial contagion and their own health. Under such conditions, banks are more likely to behave conservatively and quickly act on information they receive from their local environment. A sudden financial shock, therefore, can be characterized by high-intensity local impact on confidence. We find that such local impacts quickly spread throughout the network, causing more damage than a shock that evenly affects all localities in the system; for example, a complete breakdown of the system occurs with a higher probability. The results are explained analytically by linking system performance to the speed of decrease in confidence.

1076-2787
Davidovic, Stojan
5825c753-1e8f-42dd-bc3e-312f72c33c1d
Kothiyal, Amit
a7d1dafb-8921-4c2b-8fd5-ba8e77a8e8f6
Galesic, Mirta
c2fa14e9-d849-426b-a180-16df684ae86c
Katsikopoulos, Konstantinos
b97c23d9-8b24-4225-8da4-be7ac2a14fba
Arinaminpathy, Nimalan
41ab9c51-5636-456a-bb07-c162c5453a85
Davidovic, Stojan
5825c753-1e8f-42dd-bc3e-312f72c33c1d
Kothiyal, Amit
a7d1dafb-8921-4c2b-8fd5-ba8e77a8e8f6
Galesic, Mirta
c2fa14e9-d849-426b-a180-16df684ae86c
Katsikopoulos, Konstantinos
b97c23d9-8b24-4225-8da4-be7ac2a14fba
Arinaminpathy, Nimalan
41ab9c51-5636-456a-bb07-c162c5453a85

Davidovic, Stojan, Kothiyal, Amit, Galesic, Mirta, Katsikopoulos, Konstantinos and Arinaminpathy, Nimalan (2019) Liquidity hoarding in financial networks: The role of structural uncertainty. Complexity, 2019, [8436505]. (doi:10.1155/2019/8436505).

Record type: Article

Abstract

The dynamics of confidence affect a plethora of financial phenomena including liquidity hoarding. We present a multiagent model of a financial network in which confidence dynamics are shaped by structural uncertainty—that is, the lack of knowledge about the network of interbank cross-exposures. During a financial crisis, structural uncertainty makes it difficult for banks to assess the risk of financial contagion and their own health. Under such conditions, banks are more likely to behave conservatively and quickly act on information they receive from their local environment. A sudden financial shock, therefore, can be characterized by high-intensity local impact on confidence. We find that such local impacts quickly spread throughout the network, causing more damage than a shock that evenly affects all localities in the system; for example, a complete breakdown of the system occurs with a higher probability. The results are explained analytically by linking system performance to the speed of decrease in confidence.

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More information

Accepted/In Press date: 4 September 2018
e-pub ahead of print date: 8 January 2019
Published date: 2019

Identifiers

Local EPrints ID: 438779
URI: http://eprints.soton.ac.uk/id/eprint/438779
ISSN: 1076-2787
PURE UUID: 55d8df59-08c8-4aa4-84bb-a1729a9ea77e
ORCID for Konstantinos Katsikopoulos: ORCID iD orcid.org/0000-0002-9572-1980

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Date deposited: 24 Mar 2020 17:30
Last modified: 06 Jun 2024 01:58

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Contributors

Author: Stojan Davidovic
Author: Amit Kothiyal
Author: Mirta Galesic
Author: Nimalan Arinaminpathy

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