in 't Veld, D., van der Leij, M. and Hommes, C. (2020). The formation of a core-periphery structure in heterogeneous financial networks Journal of Economic Dynamics and Control, 119.
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Affiliated author
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Publication year2020
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JournalJournal of Economic Dynamics and Control
Recent empirical evidence suggests that financial networks exhibit a core-periphery network structure. This paper aims at giving an explanation for the emergence of such a structure using network formation theory. We propose a general, stylized model of the interbank trading market, in which banks compete for intermediation benefits. Focusing on the role of bank heterogeneity, we find that a core-periphery network cannot be unilaterally stable when banks are homogeneous. A core-periphery network structure can form endogenously, however, if we allow for heterogeneity among banks in size. Moreover, size heterogeneity may arise endogenously if payoffs feed back into bank size.