Financial market complexity and stability

Researchers report an analytical method to estimate the risk of market collapse for a network of banks in which the banks’ probabilities of default depend upon each other via credit contracts, and find that increasing the complexity of the credit network among market participants may decrease the capacity of banks and regulators, which may be using incomplete contract information, to estimate default probabilities, suggesting that market complexity may limit the ability of banks and regulators to assess and mitigate systemic financial risk.

Article #15-21573: “The price of complexity in financial networks,” by Stefano Battiston, Guido Caldarelli, Robert M. May, Tarik Roukny, and Joseph E. Stiglitz.