An edition of Complexity and financial panics (2009)

Complexity and financial panics

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Last edited by MARC Bot
August 29, 2021 | History
An edition of Complexity and financial panics (2009)

Complexity and financial panics

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During extreme financial crises, all of a sudden, the financial world that was once rife with profit opportunities for financial institutions (banks, for short), becomes exceedingly complex. Confusion and uncertainty follow, ravaging financial markets and triggering massive flight-to-quality episodes. In this paper we propose a model of this phenomenon. In our model, banks normally collect information about their trading partners which assures them of the soundness of these relationships. However, when acute financial distress emerges in parts of the financial network, it is not enough to be informed about these partners, as it also becomes important to learn about the health of their trading partners. As conditions continue to deteriorate, banks must learn about the health of the trading partners of the trading partners of the trading partners, and so on. At some point, the cost of information gathering becomes too unmanageable for banks, uncertainty spikes, and they have no option but to withdraw from loan commitments and illiquid positions. A flight-to-quality ensues, and the financial crisis spreads. Keywords: Financial network, complexity, uncertainty, flight to quality, cascades,crises, information cost, financial panic, credit crunch. JEL Classifications: E0, G1, D8, E5.

Publish Date
Language
English
Pages
34

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Edition Availability
Cover of: Complexity and financial panics
Complexity and financial panics
2009, Massachusetts Institute of Technology, Dept. of Economics
in English

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Book Details


Edition Notes

"May 15, 2009."

Includes bibliographical references (p. 33-34).

Abstract in HTML and working paper for download in PDF available via World Wide Web at the Social Science Research Network.

Published in
Cambridge, MA
Series
Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 09-17, Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 09-17.

The Physical Object

Pagination
34 p. :
Number of pages
34

ID Numbers

Open Library
OL24647030M
Internet Archive
complexityfinanc00caba
OCLC/WorldCat
671915185

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Download catalog record: RDF / JSON
August 29, 2021 Edited by MARC Bot import existing book
August 12, 2020 Edited by MARC Bot remove fake subjects
May 13, 2011 Created by ImportBot initial import