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Portfolio homogeneity and systemic risk of financial networks

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  • Huang, Yajing
  • Liu, Taoxiong
  • Lien, Donald

Abstract

The present study argues that systemic risk can be understood from two different perspectives, the homogeneity of asset portfolios held by different financial institutions and contagion mechanism. Existing works only emphasize contagion as the basic mechanism of financial crisis. Portfolio homogeneity increases the positive correlations among institutions and therefore the probability of simultaneous collapses of a considerable part of the network. When the contagion was fairly weak, a high portfolio homogeneity would lead to high systemic risk. But, if the contagion is considerably strong, the systemic risk would quite likely be negatively correlated to portfolio homogeneity.

Suggested Citation

  • Huang, Yajing & Liu, Taoxiong & Lien, Donald, 2023. "Portfolio homogeneity and systemic risk of financial networks," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 248-275.
    • Handle: RePEc:eee:empfin:v:70:y:2023:i:c:p:248-275
    DOI: 10.1016/j.jempfin.2022.11.008
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    2. Lei Li & Kun Qin & Desheng Wu, 2023. "A Hybrid Approach for the Assessment of Risk Spillover to ESG Investment in Financial Networks," Sustainability, MDPI, vol. 15(7), pages 1-16, April.
    3. Ruijie Liu & Yajing Huang, 2023. "Structural Analysis of Projected Networks of Shareholders and Stocks Based on the Data of Large Shareholders’ Shareholding in China’s Stocks," Mathematics, MDPI, vol. 11(6), pages 1-25, March.

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    More about this item

    Keywords

    Financial network; Portfolio homogeneity; Contagion; Systemic risk;
    All these keywords.

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G01 - Financial Economics - - General - - - Financial Crises

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