Open AccessFinancial Fragility and Interbank Structure
Author(s) -
Yalan Feng
Publication year - 2018
Publication title -
accounting and finance research
Language(s) - English
Resource type - Journals
eISSN - 1927-5994
pISSN - 1927-5986
DOI - 10.5430/afr.v7n3p138
Subject(s) - financial fragility , fragility , market liquidity , economics , moral hazard , robustness (evolution) , replicate , liquidity preference , monetary economics , financial crisis , microeconomics , incentive , macroeconomics , biochemistry , chemistry , statistics , mathematics , gene
This paper follows Allen and Gale (2000) to model financial contagion as an equilibrium phenomenon. I assume a two-country economy where banks in each country hold interregional claims on other banks to provide insurance against liquidity preference shocks. The results completely replicate Allen-Gale model. To further test the relative robustness of different market structures I test the implication of moral hazard as in Brusco and Castiglionesi (2007). I find that under certain situation, complete and incomplete structures are equally fragile.