TI Complexity in Economics Seminars

Edoardo Gallo (University of Cambridge, United Kingdom)
Wednesday, 17 May 2017

We investigate how the network structure of financial linkages and uncertainty about the location of a shock affect the likelihood of contagion and the formation of prices in a double auction experiment. Core-periphery networks are highly susceptible to contagion  and generate fire sales of assets that exacerbate financial contagion beyond the mechanical role of network structure. In contrast, contagion is minimal on circle networks and market prices remain stable even in the presence of large shocks. Uncertainty on the location of the shock has little influence. The traders’ level of comprehension of the network-driven risk is predictive of their behavior and the likelihood of bankruptcy.