eprintid: 10186749
rev_number: 9
eprint_status: archive
userid: 699
dir: disk0/10/18/67/49
datestamp: 2024-02-06 17:05:33
lastmod: 2024-02-09 12:06:13
status_changed: 2024-02-06 17:05:33
type: working_paper
metadata_visibility: show
sword_depositor: 699
creators_name: Tasca, Paolo
creators_name: Battiston, Stefano
title: Diversification and Financial Stability
ispublished: pub
divisions: UCL
divisions: B04
divisions: C05
divisions: F48
keywords: Naive Diversification, Leverage, Default Probability
note: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions.
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.
date: 2014-02-17
publisher: Systemic Risk Centre, London School of Economics and Political Science
official_url: https://www.systemicrisk.ac.uk/publications/discussion-papers/diversification-and-financial-stability
oa_status: green
full_text_type: pub
language: eng
primo: open
primo_central: open_green
verified: verified_manual
elements_id: 2101124
lyricists_name: Tasca, Paolo
lyricists_id: PTASC73
actors_name: Allington-Smith, Dominic
actors_id: DAALL44
actors_role: owner
full_text_status: public
series: SRC Discussion Paper
number: 10
place_of_pub: London, UK
pages: 40
issn: 2054-538X
citation:        Tasca, Paolo;    Battiston, Stefano;      (2014)    Diversification and Financial Stability.                    (SRC Discussion Paper  10). Systemic Risk Centre, London School of Economics and Political Science: London, UK.       Green open access   
 
document_url: https://discovery.ucl.ac.uk/id/eprint/10186749/1/Tasca_lse.ac.uk_storage_LIBRARY_Secondary_libfile_shared_repository_Content_System%20Risk%20Center_Discussion%20Papers_dp-10.pdf