Diversification disasters

Ибрагимов, Рустам; Jaffee, Dwight M.; Waldén, Johan

doi:10.1016/j.jfineco.2010.08.015

Cited by 243 publications

(129 citation statements)

References 31 publications

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“…This is consistent with the theoretical argument outlaid among others by Das and Uppal (2004), Wagner (2010), Ibragimov et al (2011) andRaffestin (2014), which has so far lacked empirical evidence. Also the Investment Quality of the asset portfolio seems to atter for the DMES, even though its statistical and economic significance appear rather small.…”

Section: Systemic Risk Measures and Insurers' Fundamentalssupporting

confidence: 92%

Insurance Activities and Systemic Risk

Berdin

Sottocornolay

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractThis paper investigates systemic risk in the insurance industry. We first analyze the systemic contribution of the insurance industry vis-à-vis other industries by applying 3 measures, namely the linear Granger causality test, conditional value at risk and marginal expected shortfall, on 3 groups, namely banks, insurers and non-financial companies listed in Europe over the last 14 years. We then analyze the determinants of the systemic risk contribution within the insurance industry by using balance sheet level data in a broader sample. Our evidence suggests that i) the insurance industry shows a persistent systemic relevance over time and plays a subordinate role in causing systemic risk compared to banks, and that ii) within the industry, those insurers which engage more in non-insurance-related activities tend to pose more systemic risk. In addition, we are among the first to provide empirical evidence on the role of diversification as potential determinant of systemic risk in the insurance industry. Finally, we confirm that size is also a significant driver of systemic risk, whereas price-to-book ratio and leverage display counterintuitive results.

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Section: Systemic Risk Measures and Insurers' Fundamentalssupporting

confidence: 92%

Insurance Activities and Systemic Risk

Berdin

Sottocornolay

2015

SSRN Journal

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“…Moreover, we do not need to impose ad hoc asset price distributions as in the literature on diversification pitfalls in portfolios with fat-tailed distributions (to name a few, Zhou, 2010;Ibragimov et al, 2011;Mainik and Embrechts, 2012). …”

Section: Related Workmentioning

confidence: 99%

“…Pioneered by the works of Markowitz (1952), Tobin (1958) and Samuelson (1967), analytic tools have been developed to quantify the benefits derived from increased risk diversification. However, recent theoretical studies have begun to challenge this view by investigating the conditions under which diversification may have undesired effects (see, e.g., Battiston et al, 2012b;Ibragimov et al, 2011;Wagner, 2011;Stiglitz, 2010;Brock et al, 2009;Wagner, 2009;Goldstein and Pauzner, 2004). These works have found various types of mechanisms leading to the result that full diversification may not be optimal.…”

Section: Introductionmentioning

confidence: 99%

Diversification and Financial Stability

Tasca¹,

Battiston

2011

SSRN Journal

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This paper contributes to a growing literature on the pitfalls of diversification by shedding light on a new mechanism under which, full risk diversification can be suboptimal. In particular, banks must choose the optimal level of diversification in a market where returns display a bimodal distribution. This feature results from the combination of two opposite economic trends that are weighted by the probability of being either in a bad or in a good state of the world. Banks have also interlocked balance sheets, with interbank claims marked-to-market according to the individual default probability of the obligor. Default is determined by extending the Black and Cox (1976) first-passagetime approach to a network context. We find that, even in the absence of transaction costs, the optimal level of risk diversification is interior. Moreover, in the presence of market externalities, individual incentives favor a banking system that is overdiversified with respect to the level of socially desirable diversification. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior permission in writing of the publisher nor be issued to the public or circulated in any form other than that in which it is published. AbstractThis paper contributes to a growing literature on the pitfalls of diversification by shedding light on a new mechanism under which, full risk diversification can be sub-optimal. In particular, banks must choose the optimal level of diversification in a market where returns display a bimodal distribution. This feature results from the combination of two opposite economic trends that are weighted by the probability of being either in a bad or in a good state of the world. Banks have also interlocked balance sheets, with interbank claims marked-to-market according to the individual default probability of the obligor. Default is determined by extending the Black and Cox (1976) first-passage-time approach to a network context. We find that, even in the absence of transaction costs, the optimal level of risk diversification is interior. Moreover, in the presence of market externalities, individual incentives favor a banking system that is over-diversified with respect to the level of socially desirable diversification.

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“…4,5 1 Allen et al (2011, chapter 3) identify five sources for systemic risk: common exposure to asset price bubbles; mispricing of assets; fiscal deficits and sovereign default; currency mismatches in the banking system; maturity mismatches and liquidity provision. A growing literature examines a wide range of channels through which contagion in the banking sector may occur, such as common asset exposure (Acharya, 2009;Ibragimov et al, 2011;Wagner, 2010), domino effects through the payments system or interbank markets due to counterparty risk (Allen and Gale, 2000;Dasgupta, 2004;Freixas and Parigi, 1998;Freixas et al, 2000;Rochet and Tirole, 1996), or price declines and resulting margin requirements (Brunnermeier and Pedersen, 2009). Beyond these recent events, the contagion of deposit withdrawals across banks has been documented for the U.S. during the Great Depression (Calomiris and Mason, 1997;Saunders and Wilson, 1996) as well as more recently in emerging markets (De Graeve and Karas, 2010;Iyer and Puri, 2012). However, the existing literature provides only scarce guidance on which underlying economic and informational conditions may foster contagious bank runs.…”

Section: Introductionmentioning

confidence: 99%

Understanding Bank-Run Contagion

2017

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The refereeing process of this paper has been coordinated by a team composed of Gerhard Rünstler, Kalin Nikolov and Bernd Schwaab (all ECB). Terms of use: Documents inThe paper is released in order to make the research of MaRs generally available, in preliminary form, to encourage comments and suggestions prior to fi nal publication. The views expressed in the paper are the ones of the author(s) and do not necessarily refl ect those of the ECB or of the ESCB. Acknowledgements Abstract:We study experimental coordination games to examine through which transmission channels, and under which information conditions, a panic-based depositor-run at one bank may trigger a panic-based depositor-run at another bank. We find that withdrawals at one bank trigger withdrawals at another bank by increasing players' beliefs that other depositors in their own bank will withdraw, making them more likely to withdraw as well. Importantly though, observed withdrawals affect depositors' beliefs, and are thus contagious, only when depositors know that there are economic linkages between their bank and the observed bank.JEL classification: D81; G21; G28

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Diversification disasters

Cited by 243 publications

References 31 publications

Insurance Activities and Systemic Risk

Insurance Activities and Systemic Risk

Diversification and Financial Stability

Understanding Bank-Run Contagion

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