EconPapers    
Economics at your fingertips  
 

Portfolio Homogenization and Systemic Risk of Financial Network

Yajing Huang, Taoxiong Liu and Donald Lien

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we argue that systemic risk should be understood from two different perspectives, the homogeneity of portfolios (or called asset homogeneity) and the contagion mechanism. The homogenization of portfolios held by different financial institutions increases the positive correlations among them and therefore the probability of simultaneous collapses of a considerable part of the network, which are prerequisites and amplifiers of contagion. We first theoretically analyze the influence of asset homogeneity on the initial risk, fragility and systemic risk of the network. Based on the theoretical predictions, we perform simulations on regular networks and Poisson random networks to illustrate the effects of portfolio homogeneity on systemic risk. It is shown that the relationship between asset homogeneity and systemic risk is not always positively related. When the network contagion is weak, then a high asset homogeneity will lead to a high systemic risk. However, if the network contagion is considerably strong, the systemic risk is quite likely to be negative related to the asset homogeneity, so that a high homogeneity will produce a low systemic risk. Moreover, networks with strong contagion and low asset homogeneity tend to have the greatest systemic risk. Results from logistic regression analysis further clarify the relationships between systemic risk and asset homogeneity.

Keywords: Financial network; Portfolio homogenization; Contagion; Systemic risk (search for similar items in EconPapers)
JEL-codes: D85 F65 G01 G15 G32 G33 (search for similar items in EconPapers)
Date: 2017-10-13
New Economics Papers: this item is included in nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/82956/1/MPRA_paper_82956.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:82956

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().

 
Page updated 2025-03-22
Handle: RePEc:pra:mprapa:82956