Social Sciences History Seminar

Abstract: This paper proposes an endogenous network model based on constrained general equilibrium trade in asset and liability instruments. Amplification or mitigation in such network is directly related to the general equilibrium response to shocks. The model is estimated using a demand system approach, enabling us to relate the properties of the financial network to the underlying structural determinants of net asset demand by financial institutions, such as risk aversion or cost of equity. Applying this model to French banks, we find that the largest banks are not the most systemic ones and that portfolio diversification can increase bank's systemicness rather than reduce it. Counterfactual analysis using the estimated model sheds light on the impact of ECB quantitative easing policy on financial stability.

Joint work with Jonas Heipertz (Banquede France) and Amine Ouazad (HEC Montreal).