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Recreating Banking Networks under Decreasing Fixed Costs

Maringer, Dietmar and Craig, Ben R. and Paterlini, Sandra. (2019) Recreating Banking Networks under Decreasing Fixed Costs. RDB of Cleveland Working Paper, 19 (21).

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Official URL: https://edoc.unibas.ch/81892/

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Abstract

Theory emphasizes the central role of the structure of networks in the behavior of financial systems and their response to policy. Real-world networks, however, are rarely directly observable: Banks' assets and liabilities are typically known, but not who is lending how much and to whom. We first show how to simulate realistic networks that are based on balance-sheet information by minimizing costs where there is a fixed cost to forming a link. Second, we also show how to do this for a model with fixed costs that are decreasing in the number of links. To approach the optimization problem, we develop a new algorithm based on the transportation planning literature. Computational experiments find that the resulting networks are not only consistent with the balance sheets, but also resemble real-world financial networks in their density (which is sparse but not minimally dense) and in their core-periphery and disassortative structure.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Computational Economics and Finance (Maringer)
UniBasel Contributors:Maringer, Dietmar
Item Type:Working Paper
Publisher:Federal Reserve Bank of Cleveland
ISSN:2573-7953
Number of Pages:30
Note:Publication type according to Uni Basel Research Database: Discussion paper / Internet publication
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Last Modified:11 Feb 2021 10:35
Deposited On:11 Feb 2021 10:35

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