Exit Spirals in Coupled Networked Markets

Strategic agents choose whether to be active in networked markets. The value of being active depends on the activity choices of specific counterparties. Several markets are coupled when agents’ participation decisions are complements across markets. We model the problem of an analyst assessing the robustness of coupled networked markets during a crisis—an exogenous negative payoff shock—based only on partial information about the network structure. We give conditions under which exit spirals emerge—abrupt collapses of activity following shocks. Market coupling is a pervasive cause of fragility, creating exit spirals even between networks that are individually robust. The robustness of a coupled network system can be improved if one of two markets is replaced by a centralized one or if links become more correlated across markets.

History: C. Aymanns would like to acknowledge generous support from the LSE Systemic Risk Centre. C.-P. Georg gratefully acknowledges support from the Algorand Foundation. B. Golub gratefully acknowledges funding from the National Science Foundation [Grant SES-1629446 and SES-1847860].