Systemic risk and the financial network system: an experimental investigation

• Main Authors: Permana, Yudistira, Akbar, Saiqa, Nurpita, Anisa
• Format: Article PeerReviewed
• Language: English
• Published: Springer Science and Business Media Deutschland GmbH 2022
• Subjects: Finance
• Online Access: https://repository.ugm.ac.id/282839/1/s40822-022-00207-7.pdf; https://repository.ugm.ac.id/282839/; https://link.springer.com/article/10.1007/s40822-022-00207-7
• Institution: Universitas Gadjah Mada

This paper investigates the economic agent behavior when managing a bank in order to avoid a failure when exposed with the financial systemic risk using a lab experiment. We use Chen et al.’s (Oper Res 64:1089–1108, 2016) model to construct the decision problem in the experiment. The model assumes that the systemic risk occurs through two channels: the liquidity channel and the network channel. The former occurs from the external investment shock which is endogenous in the balance sheet. The latter is a function of other banks’ clearing repayment; which is also caused by the external investment shock. Given these, there are two intuitive optimal strategies in order to avoid a failure: imposing a higher external investment interest than that of its risk and avoiding the financial interactions with the high-risky banks. We use students and bankers as our subjects to check the validity of Chen et al.’s optimal strategy given their respective background. Our results show that both students and bankers partially follow Chen et al.’s intuitive optimal strategy: the first strategy. Only the student group is found to follow the second optimal intuitive strategy of Chen et al. In addition, both subject groups have a different behavior in order to avoid the failure.