Implicit government guarantees and the externality of portfolio diversification: A complex network approach

Xiaojian Niu, Xiaoli Niu and Kexing Wu

Physica A: Statistical Mechanics and its Applications, 2021, vol. 572, issue C

Abstract: Policy changes have a significant impact on financial markets. In this study, we build and calibrate a heterogeneous-agent model of a complex network using real data, then empirically examine the effects of policy changes on the risk contagion mechanism in the Chinese bond market. We find that the externality of diversification is positive, that is, a diversified portfolio can reduce the adverse effects of a negative shock, however, the positive externality weakened after the break of implicit government guarantee. Our findings show that policy changes influence the market through price co-movement and diversified portfolios. Moreover, the externality of diversification and the effect of policy changes vary between government and corporate bonds. Finally, investment strategies are proposed based on the findings.

Keywords: Implicit government guarantee; Portfolio diversification; Externality; Portfolio-overlapping (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:572:y:2021:i:c:s0378437121001801

DOI: 10.1016/j.physa.2021.125908

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