When does portfolio compression reduce systemic risk?
نویسندگان
چکیده
We analyze the consequences of portfolio compression for systemic risk. Portfolio is a post-trade netting mechanism that reduces gross positions while keeping net unchanged and it part financial legislation in United States (Dodd–Frank Act) Europe (European Market Infrastructure Regulation). derive necessary structural conditions to be harmful discuss policy implications. show any potential harmfulness arises from contagion effects. how affects risk depends on resilience nodes taking compression, proportion debt they can repay, recovery rates case default. In particular, danger comes defaults firms conduct compression. If no occur among engage then always
منابع مشابه
When does aggregation reduce risk aversion?
We study the problem of risk sharing within a household facing subjective uncertainty. A household shares uncertain prospects using a social welfare function. We characterize the social welfare functions such that the household is collectively less risk averse than each member, and satisfies the Pareto principle and an independence axiom. We single out the sum of certainty equivalents as the un...
متن کاملPortfolio Compression: Positive and Negative Effects on Systemic Risk
We show how conservative portfolio compression, i.e., netting cycles in a financial network, can increase systemic risk even though the exposures of all banks to each other decrease. We argue that this is because cycles enable risk sharing between the involved banks and can thus dampen the effect of a shock on the rest of the financial system. We first provide an example where under certain sho...
متن کاملdoes diversification reduce risk in tehran stock market when it is volatile?
empirical researches have shown that in highly volatile market, conditional correlation between returns is stronger, so diversification cannot reduce risk. to test this claim in iran’s financial market, quintiles of stock return distribution have been estimated by kernel density and garch models. then, average conditional correlation, error variance and conditional capm has been calculated to t...
متن کاملFinancial Linkages, Portfolio Choice and Systemic Risk
Financial linkages smooth the shocks faced by individual components of the system, but they also create a wedge between ownership and decision-making. The classical intuition on the role of pooling risk in raising welfare is valid when ownership is evenly dispersed. However, when the ownership of some agents is concentrated in the hands of a few others, greater integration and diversification c...
متن کاملHow damage diversification can reduce systemic risk.
We study the influence of risk diversification on cascading failures in weighted complex networks, where weighted directed links represent exposures between nodes. These weights result from different diversification strategies and their adjustment allows us to reduce systemic risk significantly by topological means. As an example, we contrast a classical exposure diversification (ED) approach w...
متن کاملذخیره در منابع من
با ذخیره ی این منبع در منابع من، دسترسی به آن را برای استفاده های بعدی آسان تر کنید
ژورنال
عنوان ژورنال: Mathematical Finance
سال: 2022
ISSN: ['0960-1627', '1467-9965']
DOI: https://doi.org/10.1111/mafi.12346