Risk Analysis of Conglomerates with Debt and Equity Links

Arturo Cifuentes () and Rodrigo Roman
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Arturo Cifuentes: Clapes UC, Pontificia Universidad Católica de Chile, Alameda, Santiago 8331150, Chile
Rodrigo Roman: Sociedad de Fomento Fabril (SOFOFA), Andres Bello, Santiago 8320000, Chile

JRFM, 2024, vol. 17, issue 9, 1-19

Abstract: Conglomerates play an important role in the functioning of capital markets. Therefore, assessing their response to external shocks is a significant risk management challenge not only for conglomerate executives but also for investors and regulators alike. In this context, a conglomerate refers to a group of companies typically operating across different industries and interconnected through both equity and debt relationships. Essentially, a conglomerate functions as a financial network whose nodes are linked by two layers of reciprocal connections. This paper introduces an algorithm to evaluate a conglomerate’s response to external shocks. Additionally, it proposes a protocol based on five key metrics that collectively summarize the conglomerate’s overall resilience. These metrics offer two major advantages: they facilitate comparisons between the strengths of different conglomerates and help assess the effectiveness of various strategies, such as internal capital reallocations, aimed at enhancing a conglomerate’s resilience. The algorithm’s usefulness, including its ability to detect cascades or “second-wave” defaults, is demonstrated through two illustrative examples.

Keywords: conglomerates; risk management; financial networks; financial strength; stress testing; simulation; systemic risk (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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