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Asset correlation and network fragility: How should we intervene?

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Systemic Risk: Mathematical Modelling and Interdisciplinary Approaches

The question of how to stabilize financial systems has attracted considerable attention since the global financial crisis of 2007-2009. Recently, Beale et al. (2011) demonstrated that higher portfolio diversity among banks would reduce systemic risk by decreasing the risk of simultaneous defaults at the expense of a higher likelihood of individual defaults. In practice, however, a bank default has an externality in that it undermines other banks’ balance sheets. In this presentation, I focus on the interplay between the interbank network and asset correlation structure. I argue that regulator’s intervention should be designed in a way that takes into account the mesoscopic features of financial markets.

This talk is part of the Isaac Newton Institute Seminar Series series.

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