Risk sharing and asset commonality in the financial sector

Kenta Toyofuku ()
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Kenta Toyofuku: Nihon University

Economics Bulletin, 2022, vol. 42, issue 1, 30 - 40

Abstract: This paper develops a model to explain why asset commonality was pervaded among financial intermediaries before the global financial crisis. We show that when there is a lack of opportunities for financial intermediaries to hedge idiosyncratic shocks, they shift their asset allocation to commonly accessible assets not only to diversify their own portfolios but also to share the risk among themselves. We also show that this asset commonality arises even if the commonly held assets are risky and unproductive. In this sense, asset commonality in the financial sector can mitigate the risk of each financial intermediary but may decrease aggregate output in the economy.

Keywords: Asset commonality; diversification; risk sharing (search for similar items in EconPapers)
JEL-codes: E4 G2 (search for similar items in EconPapers)
Date: 2022-02-20
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