Working Paper: NBER ID: w23572
Authors: Jonas Heipertz; Amine Ouazad; Romain Ranciere; Natacha Valla
Abstract: The paper uses disaggregated data on asset holdings and liabilities to estimate a general equilibrium model where each institution determines the diversification and size of the asset and liability sides of its balance-sheet. The model endogenously generates two types of financial networks: (i) a network of institutions when two institutions share common asset or liability holdings or when an institution holds an asset that is the liability of another. In both cases demand/supply decisions by one institution affect the value of other institutions' holdings/liabilities, (ii) a network of financial instruments implied by the distribution of assets and liabilities within and across institutions. A change in the price of one asset induces change in demand/supply for all other assets, thus generating price comovement. The general equilibrium analysis predicts the propagation of real, financial and regulatory shocks as well as the change in the network caused by the shock.
Keywords: Financial Networks; General Equilibrium; Balance Sheet Diversification; Systemic Risk
JEL Codes: G11; G15; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shock to the capital base of the banking sector (F65) | affects equity and net asset demands (G32) |
| affects equity and net asset demands (G32) | influences the entire financial system (F65) |
| shock to the capital base of the banking sector (F65) | influences the entire financial system (F65) |
| underlying characteristics of the institutions (D02) | shapes the structure of financial networks (D85) |
| return beliefs (D83) | account for a substantial variance in actual returns (G17) |
| financial networks and balance sheet diversification (G29) | propagate financial shocks (E44) |