In chapter 7 of book 1, network risk is defined. However, I do not understand it or the example that is given.
This comes directly from Brunnermeier (2009) since it is identical to the book.
In the given example Goldman has a swap agreement with the hedge fund which in turn has a swap agreement with Bear Stearns. Then somehow it is relevant that it would be unwise for Goldman to renew the contract with Bear Stearns. I find this confusing because Goldman does not have a contract with Bear Stearns in the example (only with the hedge fund).
The chapter continues but this section reads as if "network risk" should be illustrated within these sentences. Also in the BT study notes the same (paraphrased) section ends with "This best explains the networking risk". However, I fail to see the definition of "network risk" within the example.
Can somebody help?
This comes directly from Brunnermeier (2009) since it is identical to the book.
In the given example Goldman has a swap agreement with the hedge fund which in turn has a swap agreement with Bear Stearns. Then somehow it is relevant that it would be unwise for Goldman to renew the contract with Bear Stearns. I find this confusing because Goldman does not have a contract with Bear Stearns in the example (only with the hedge fund).
The chapter continues but this section reads as if "network risk" should be illustrated within these sentences. Also in the BT study notes the same (paraphrased) section ends with "This best explains the networking risk". However, I fail to see the definition of "network risk" within the example.
Can somebody help?