Financial Linkages, Portfolio Choice and Systemic Risk

Andrea Galeotti, Christian Ghiglinoy and Sanjeev Goyal

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: 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 can lead to excessive risk taking and volatility and result in lower welfare. We also show that individuals undertake too little (too much) risk relative to the first best if the network is homogeneous (heterogeneous), and study optimal networks.

Date: 2016-02-19
New Economics Papers: this item is included in nep-rmg
Note: sg472
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:1612

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