title: The price of complexity in financial networks.
abstract: Financial institutions form multilayer networks by engaging in contracts with each other and by holding exposures to common assets. As a result, the default probability of one institution depends on the default probability of all of the other institutions in the network. Here, we show how small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults. From the point of view of financial regulators, our findings show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises.
authors.affiliation: FINEXUS - Center for Financial Networks and Sustainability, Department of Banking and Finance, University of Zurich, 8032 Zurich, Switzerland; stefano.battiston@uzh.ch.
authors.forename: Stefano
authors.identifier: 0000-0002-0051-973X
authors.initials: S
authors.lastname: Battiston
authors.affiliation: IMT School for Advanced Studies, 55100 Lucca, Italy; Institute for Complex Systems, CNR, 00185 Rome, Italy; London Institute for Mathematical Sciences, London W1K 2XF, United Kingdom;
authors.forename: Guido
authors.identifier: 0000-0001-9377-3616
authors.initials: G
authors.lastname: Caldarelli
authors.affiliation: Oxford University, Oxford OX1 1HP, United Kingdom.
authors.forename: Robert M
authors.initials: RM
authors.lastname: May
authors.affiliation: Institut de Recherches Interdisciplinaires et de Développements en Intelligence Artificielle, École Polytechnique & Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, 1050 Brussels, Belgium; Fonds National de la Recherche Scientifique, 1000 Brussels, Belgium;
authors.forename: Tarik
authors.initials: T
authors.lastname: Roukny
authors.affiliation: Columbia University, New York, NY 10027.
authors.forename: Joseph E
authors.initials: JE
authors.lastname: Stiglitz
keywords: complexity; default probability; financial contagion; financial networks; systemic risk