@misc{discovery10186749,
            note = {This version is the version of record. For information on re-use, please refer to the publisher's terms and conditions.},
         address = {London, UK},
          number = {10},
           month = {February},
          series = {SRC Discussion Paper},
            year = {2014},
           title = {Diversification and Financial Stability},
       publisher = {Systemic Risk Centre, London School of Economics and Political Science},
             url = {https://www.systemicrisk.ac.uk/publications/discussion-papers/diversification-and-financial-stability},
        abstract = {The recent credit crisis of 2007/08 has raised a debate about the so-called knife-edge properties of financial markets. The paper contributes to the debate shedding light on the controversial relation between risk-diversification and financial stability. We model a financial network where assets held by borrowers to meet their obligations, include claims against other borrowers and securities exogenous to the network. The balance-sheet approach is conjugated with a stochastic setting and by a mean-field approximation the law of motion of the system's fragility is derived. We show that diversification has an ambiguous effect and beyond a certain levels elicits financial instability. Moreover, we find that risk-sharing restrictions create a socially preferable outcome. Our findings have significant implications for future policy recommendation.},
            issn = {2054-538X},
          author = {Tasca, Paolo and Battiston, Stefano},
        keywords = {Naive Diversification, Leverage, Default Probability}
}