Banwo, O;
Harrald, P;
Medda, F;
(2019)
Understanding the consequences of diversification on financial stability.
Journal of Economic Interaction and Coordination
, 14
(2)
pp. 273-292.
10.1007/s11403-018-0216-9.
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Abstract
In this paper, we study the consequences of diversification on financial stability and social welfare using an agent based model that couples the real economy and a financial system. We validate the model against its ability to reproduce several stylized facts reported in real economies. We find that the risk of an isolated bank failure (i.e. idiosyncratic risk) is decreasing with diversification. In contrast, the probability of joint failures (i.e. systemic risk) is increasing with diversification which results in more downturns in the real sector. Additionally, we find that the system displays a “robust yet fragile” behaviour particularly for low diversification. Moreover, we study the impact of introducing preferential attachment into the lending relationships between banks and firms. Finally, we show that a regulatory policy that promotes bank–firm credit transactions that reduce similarity between banks can improve financial stability whilst permitting diversification.
| Type: | Article |
|---|---|
| Title: | Understanding the consequences of diversification on financial stability |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.1007/s11403-018-0216-9 |
| Publisher version: | https://doi.org/10.1007/s11403-018-0216-9 |
| Language: | English |
| Additional information: | Copyright © The Author(s) 2018. Open Access: This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made. |
| Keywords: | Contagion, Diversification, Systemic risk, Agent based models |
| UCL classification: | UCL UCL > Provost and Vice Provost Offices > UCL BEAMS UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Chemical Engineering UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Civil, Environ and Geomatic Eng |
| URI: | https://discovery.ucl.ac.uk/id/eprint/10051725 |
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