Working Paper: CEPR ID: DP17511
Authors: Olivier Accominotti; Delio Lucena; Stefano Ugolini
Abstract: We propose a new methodology to assess intermediaries’ substitutability in financial networks featuring higher-order structures (credit intermediation chains). We represent the financial network as a hyperstructure and each credit intermediation chain as a hyperedge. This approach allows us to assess how the failure of intermediaries affects network connectivity. We apply this methodology to a unique dataset documenting the structure of the international, sterling money market at the heyday of the first globalization era (1880-1913). Our results reveal that the failure of individual money market actors could only cause limited damage to the network as intermediaries were highly substitutable. These findings suggest that an international financial network without highly systemic nodes can emerge even at a time of global economic integration.
Keywords: financial networks; systemic risk; hypergraphs; intermediation chains; bills of exchange; hyperstructures
JEL Codes: D85; E42; F30; G20; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| failure of individual money market actors (E44) | limited damage to the network (D85) |
| failure of intermediaries (L14) | loss of market access for actors (F69) |
| removal of specific intermediaries (L14) | number of actors losing market access (L19) |
| low systemicness of network (D85) | emergence of international financial network (F30) |
| removal of a few systemic nodes (Y60) | limited damage to the network (D85) |
| high substitutability of intermediaries (D43) | limited damage to the network (D85) |