Financial Networks and Contagion

Wednesdays@NICO Seminar, Noon, April 23, 2014, Chambers Hall, Lower Level

Professor Benjamin Golub, Harvard University


We model contagions and cascades of failures among organizations linked through a network of financial interdependencies. We identify how the network propagates discontinuous changes in asset values triggered by failures (e.g., bankruptcies, defaults, and other insolvencies) and use that to study the consequences of integration (each organization becoming more dependent on its counterparties) and diversification (each organization interacting with a larger number of counterparties). Integration and diversification have different, nonmonotonic effects on the extent of cascades. Initial increases in diversification connect the network which permits cascades to propagate further, but eventually, more diversification makes contagion between any pair of organizations less likely as they become less dependent on each other. Integration also faces tradeoffs: increased dependence on other organizations versus less sensitivity to own investments. Finally, we illustrate some aspects of the model with data on European debt cross-holdings. Paper can be downloaded here.


Benjamin Golub is currently a Junior Fellow at the Harvard Society of Fellows, and will begin an appointment as an Assistant Professor at the Harvard Department of Economics in July 2015. He received a Ph.D. in Economics from the Stanford Graduate School of Business in 2012, and a B.S. in Mathematics from the California Institute of Technology in 2007. Ben’s research focuses on microeconomic theory, and in particular, social and economic networks: how these networks form when agents invest strategically in relationships, how information is transmitted through them, and how they mediate processes such as group cooperation. Applications of his research include measuring social segregation and understanding its consequences for polarization of beliefs or behaviors.