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Risk sharing and asset commonality in the financial sector

Author

Listed:
  • Kenta Toyofuku

    (Nihon University)

Abstract

This paper develops a model to explain why asset commonality was pervaded among financial intermediaries before the global financial crisis. We show that when there is a lack of opportunities for financial intermediaries to hedge idiosyncratic shocks, they shift their asset allocation to commonly accessible assets not only to diversify their own portfolios but also to share the risk among themselves. We also show that this asset commonality arises even if the commonly held assets are risky and unproductive. In this sense, asset commonality in the financial sector can mitigate the risk of each financial intermediary but may decrease aggregate output in the economy.

Suggested Citation

  • Kenta Toyofuku, 2022. "Risk sharing and asset commonality in the financial sector," Economics Bulletin, AccessEcon, vol. 42(1), pages 30-40.
    • Handle: RePEc:ebl:ecbull:eb-21-01077
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2022/Volume42/EB-22-V42-I1-P3.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Asset commonality; diversification; risk sharing;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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