This paper develops a theory of financial intermediation. Consider an environment with repeated financial interactions in which strategic default is possible. We show that if interactions between any lender and borrower are infrequent and if market participants have incomplete knowledge of the patterns of interactions in the market, then all investments must be intermediated. Moreover, each int...

Econophysics has developed as a research field that applies the formalism of Statistical Mechanics and Quantum Mechanics to address Economics and Finance problems. The branch of Econophysics that applies of Quantum Theory to Economics and Finance is called Quantum Econophysics. In Finance, Quantum Econophysics’ contributions have ranged from option pricing to market dynamics modeling, behaviora...

Following the financial crisis of 2007-2008, a deep analogy between the origins of instability in financial systems and complex ecosystems has been pointed out: in both cases, topological features of network structures influence how easily distress can spread within the system. However, in financial network models, the details of how financial institutions interact typically play a decisive rol...

In this section, we present a three-organization example to illustrate more about how the A and the C matrices can differ. Recall our simple example from Section IG (see Figure 1). There are two organizations, i = 1, 2, each of which has a 50% stake in the other organization. The associated crossholdings matrix C and the dependency matrix A are as follows. (Recall that Ĉii is equal to 1 minus t...

We develop a theoretical model of a network of intermediaries, which gives rise to heterogeneous financial norms and systemic vulnerabilities. The optimal behavior of each intermediary regarding its attitude toward risk, the quality of the projects that it undertakes, and the intermediaries it chooses to interact with, is affected by the behavior of its counterparties. These strategic network e...

Interbank claims are a concern to regulators as they might facilitate the dissemination of defaults and generate spill-over effects. Building on a simple model, this paper introduces a measure of the spill-over effects that a bank generates when it defaults. The measure is based on an explicit criterion, the aggregate debt repayments, and is bank’s specific, affected by the bank’s characteristi...

Interconnections among financial institutions create potential channels for contagion and amplification of shocks to the financial system. We estimate the extent to which interconnections increase expected losses and defaults under a wide range of shock distributions. In contrast to most work on financial networks, we assume only minimal information about network structure and rely instead on i...

The econophysics approach to socio-economic systems is based on the assumption of their complexity. Such assumption inevitably leads to another assumption, namely that underlying interconnections within socio-economic systems, particularly nancial markets, are nonlinear, which is shown to be true even in mainstream economic literature. Thus it is surprising to see that network analysis of nanci...

The study of Artificial Neural Networks derives from first trials to translate in mathematical models the principles of biological “processing”. An Artificial Neural Network deals with generating, in the fastest times, an implicit and predictive model of the evolution of a system. In particular, it derives from experience its ability to be able to recognize some behaviours or situations and to ...

Determining the causes of instability and contagion in financial networks is necessary to inform policy and avoid future financial collapse. In the American Economic Review, Elliott, Golub and Jackson proposed a simple model for capturing the dynamics of complex financial networks. In Elliott, Golub and Jackson’s model, the institutions in the network are connected by linear dependencies (cross...