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## Quantifying the Impact of Leveraging and Diversification on Systemic Risk (2014)

Citations: | 1 - 1 self |

### Citations

3033 | Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure
- Jensen, Meckling
- 1976
(Show Context)
Citation Context ...eered by Evans and Archer (1968) and Elton and Gruber (1977) to a systemic context. This allows to better understand the controversial relation between the firm capital structure and diversification (=-=Jensen and Meckling, 1976-=-). Finally, our work complements existing theoretical literature that, after the 2007-2008 financial crisis, started to investigate the role of risk diversification for the stability of the financial ... |

2235 | On the Pricing of Corporate Debt: The Risk Structure of Interest Rates - MERTON - 1974 |

127 | Optimal multi-period portfolio policies,” - Mossin - 1968 |

87 |
Handbook of Statistical Tables,
- Owen
- 1962
(Show Context)
Citation Context ...(z1, z2), to obtain the cumulative function Φ2. This is generally not simple, especially when the asset correlation ρ1,2 is non-constant. Various tables exist if g is a bivariate normal distribution (=-=Owen, 1962-=-; Pearson, 1931). Because this does not apply to our case, we use a method proposed by Jantaravareerat (1998), which allows us to calculate Φ2 as follows: 1. Calculate the joint probability density fu... |

50 | Liaisons dangereuses: Increasing connectivity, risk sharing, and systemic risk.
- Battiston, Gatti, et al.
- 2012
(Show Context)
Citation Context ...scribed as the risk that a failing agent (e.g. a bank in a financial system or a firm in a supply system) causes the failure of other agents such that failing cascades may encompass the whole system (=-=Battiston et al., 2009-=-b). This approach differs from other notions of risk (Embrechts et al., 2011) which treat the default of individual agents as an extreme event for which the probability is calculated regardless of the... |

39 | Risk reduction and portfolio size: An analytical solution - J, Gruber - 1977 |

31 |
More hedging instruments may destabilize markets
- Brock, Hommes, et al.
(Show Context)
Citation Context ...existing theoretical literature that, after the 2007-2008 financial crisis, started to investigate the role of risk diversification for the stability of the financial system (Battiston et al., 2009a; =-=Brock et al., 2009-=-; Ibragimov and Walden, 2007; Stiglitz, 2010; Wagner, 2009). Our results about a critical level of diversification can be used for improving macro-prudential regulations, for example by enforcing a ce... |

29 | Presidential Address: Sophisticated Investors and Market Efficiency”, - STEIN - 2009 |

28 |
The limits of diversification when losses may be large,
- Ibragimov, Walden
- 2007
(Show Context)
Citation Context ... literature that, after the 2007-2008 financial crisis, started to investigate the role of risk diversification for the stability of the financial system (Battiston et al., 2009a; Brock et al., 2009; =-=Ibragimov and Walden, 2007-=-; Stiglitz, 2010; Wagner, 2009). Our results about a critical level of diversification can be used for improving macro-prudential regulations, for example by enforcing a ceiling to excessive leverage.... |

20 |
A survey of contingent-claims approaches to risky debt valuation
- Bohn
(Show Context)
Citation Context ... Merton (1974) in which the firm’s leverage plays a major role. This approach has become popular among both academicians and practitioners thanks to its tractability and simplicity. For a survey see (=-=Bohn, 2000-=-). Moreover, the Financial Stability Board (2010) recommends it as a building block in establishing a regulatory framework that can cope with risk from systemic linkages. These linkages arise from bil... |

20 | A new interpretation of information rate. - Jr, L - 1956 |

19 |
Balance-Sheet Contagion.
- Kiyotaki, Moore
- 2002
(Show Context)
Citation Context ...atory framework that can cope with risk from systemic linkages. These linkages arise from bilateral exposures (e.g. mutual claims) and common assets which may lead to interlocking balance sheets (see =-=Kiyotaki and Moore, 2002-=-). Including these effects into a systemic notion of risk requires explicit knowledge of banks’ balance sheets and their change over time. This information is mostly confidential, due to strategic iss... |

19 |
Risk and Global Economic Architecture: Why Full Financial Integration May Be Undesirable, American Economic Review
- Stiglitz
- 2010
(Show Context)
Citation Context ...2007-2008 financial crisis, started to investigate the role of risk diversification for the stability of the financial system (Battiston et al., 2009a; Brock et al., 2009; Ibragimov and Walden, 2007; =-=Stiglitz, 2010-=-; Wagner, 2009). Our results about a critical level of diversification can be used for improving macro-prudential regulations, for example by enforcing a ceiling to excessive leverage. 2 Model 2.1 Ban... |

16 |
Turner Review: A Regulatory Response to the Global Banking Crisis. London: Financial Services Authority.
- FSA
- 2009
(Show Context)
Citation Context ...ossible interdependence. Excessive leverage refers to the practice of banks to engage in huge debt to buy more assets, in order to increase their return on equity. As the Financial Service Authority (=-=FSA, 2009-=-) and the Financial Stability Board (FSB, 2009) jointly point out, excessive leverage by banks increases systemic risk. However, our hypothesis is that diversification can compensate some of the hazar... |

11 |
Modelling Extremal Events for Insurance and Finance, volume 33 of Applications of Mathematics
- Embrechts, Klüppelberg, et al.
- 2003
(Show Context)
Citation Context ...or a firm in a supply system) causes the failure of other agents such that failing cascades may encompass the whole system (Battiston et al., 2009b). This approach differs from other notions of risk (=-=Embrechts et al., 2011-=-) which treat the default of individual agents as an extreme event for which the probability is calculated regardless of the interaction among economic agents. Instead, a systemic notion of risk requi... |

3 |
Report of the financial stability forum on addressing procyclicality in the financial system. Financial Stability Forum
- FSB
- 2009
(Show Context)
Citation Context ...fers to the practice of banks to engage in huge debt to buy more assets, in order to increase their return on equity. As the Financial Service Authority (FSA, 2009) and the Financial Stability Board (=-=FSB, 2009-=-) jointly point out, excessive leverage by banks increases systemic risk. However, our hypothesis is that diversification can compensate some of the hazards of excessive leverage, under optimal condit... |

2 | Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations: Report to the G-20 Finance Ministers and Central Bank Governors - Board - 2010 |

1 | Multiple defaults and merton’s model - Cathcart, El-Jahel - 2004 |

1 | Approximation of the Distribution Function for the Standard Bivariate Normal - Jantaravareerat - 1998 |

1 |
Table for Statiticians and Biometricians
- Pearson
- 1931
(Show Context)
Citation Context ... obtain the cumulative function Φ2. This is generally not simple, especially when the asset correlation ρ1,2 is non-constant. Various tables exist if g is a bivariate normal distribution (Owen, 1962; =-=Pearson, 1931-=-). Because this does not apply to our case, we use a method proposed by Jantaravareerat (1998), which allows us to calculate Φ2 as follows: 1. Calculate the joint probability density function g(z1, z2... |

1 |
Diversification and financial stability. CCSS Working Paper
- Tasca, Battiston
- 2011
(Show Context)
Citation Context ...n show that n? increases for “crashing” markets, µ < 0, and decreases for “booming” markets, µ > 0. This is in line with economic intuition, i.e. diversification works well only in a booming market, (=-=Tasca and Battiston, 2011-=-). The specific dependence n?(fn, fa, N, χ) can be obtained only numerically. Table 1 gives some numbers for the minimum value, in accordance with Figure 1. 5We talk about small positive values of −10... |