@techreport{NBERw16177, title = "Financial Connections and
Systemic Risk", author = "Franklin Allen and Ana Babus and Elena
Carletti", institution = "National Bureau of Economic Research",
type = "Working Paper", series = "Working Paper Series", number
= "16177", year = "2010", month = "July", doi =
{10.3386/w16177}, URL = "http://www.nber.org/papers/w16177",
abstract = {We develop a model where institutions form
connections through swaps of projects in order to diversify
their individual risk. These connections lead to two different
network structures. In a clustered network groups of financial
institutions hold identical portfolios and default together. In
an unclustered network defaults are more dispersed. With long
term finance welfare is the same in both networks. In contrast,
when short term finance is used, the network structure matters.
Upon the arrival of a signal about banks' future defaults,
investors update their expectations of bank solvency. If their
expectations are low, they do not roll over t