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Systemic risk and financial regulations: A theoretical perspective

Robert Prasch and Thierry Warin ()

Journal of Banking Regulation, 2016, vol. 17, issue 3, 188-199

Abstract: This article inserts the notion of systemic risk into the theoretical foundations of modern finance. By systemic risk, we mean risks because of interdependence among leading firms, in other words complexity. It builds upon the traditional mean-variance approach while reconsidering an inadequately contemplated source of risk: the actual organization of the financial market. As such, we take seriously the idea that some oligopolistic firms may be understood by market participants to be central to the fabric of modern financial markets, and in that sense can be deemed too big to fail. While we believe that much of traditional financial analysis is valid in its own terms, we also believe that important insights can be acquired from melding Modern Portfolio Theory with recent developments in Industrial Organization.

Date: 2016
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