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Type | Journal Article |
Scope | Discipline-based scholarship |
Title | Portfolio Diversification and Systemic Risk in Interbank Networks |
Organization Unit | |
Authors |
|
Item Subtype | Original Work |
Refereed | Yes |
Status | Published in final form |
Language |
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Journal Title | Journal of Economic Dynamics and Control |
Publisher | Elsevier |
Geographical Reach | international |
ISSN | 0165-1889 |
Volume | 82 |
Page Range | 96 - 124 |
Date | 2017 |
Abstract Text | The recent credit crisis of 2007/08 has raised a debate about the so-called knife-edge properties of financial markets. The paper contributes to the debate shedding light on the controversial relation between risk-diversification and financial stability. We model a financial network where assets held by borrowers to meet their obligations, include claims against other borrowers and securities exogenous to the network. The balance-sheet approach is conjugated with a stochastic setting and by a mean-field approximation the law of motion of the system's fragility is derived. We show that diversification has an ambiguous effect and beyond a certain levels elicits financial instability. Moreover, we find that risk-sharing restrictions create a socially preferable outcome. Our findings have significant implications for future policy recommendation. |
Related URLs | |
Digital Object Identifier | 10.1016/j.jedc.2017.01.013 |
Other Identification Number | merlin-id:14736 |
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