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Risk Analysis of Conglomerates with Debt and Equity Links

Author

Listed:
  • Arturo Cifuentes

    (Clapes UC, Pontificia Universidad Católica de Chile, Alameda, Santiago 8331150, Chile)

  • Rodrigo Roman

    (Sociedad de Fomento Fabril (SOFOFA), Andres Bello, Santiago 8320000, Chile)

Abstract

Conglomerates play an important role in the functioning of capital markets. Therefore, assessing their response to external shocks is a significant risk management challenge not only for conglomerate executives but also for investors and regulators alike. In this context, a conglomerate refers to a group of companies typically operating across different industries and interconnected through both equity and debt relationships. Essentially, a conglomerate functions as a financial network whose nodes are linked by two layers of reciprocal connections. This paper introduces an algorithm to evaluate a conglomerate’s response to external shocks. Additionally, it proposes a protocol based on five key metrics that collectively summarize the conglomerate’s overall resilience. These metrics offer two major advantages: they facilitate comparisons between the strengths of different conglomerates and help assess the effectiveness of various strategies, such as internal capital reallocations, aimed at enhancing a conglomerate’s resilience. The algorithm’s usefulness, including its ability to detect cascades or “second-wave” defaults, is demonstrated through two illustrative examples.

Suggested Citation

  • Arturo Cifuentes & Rodrigo Roman, 2024. "Risk Analysis of Conglomerates with Debt and Equity Links," JRFM, MDPI, vol. 17(9), pages 1-19, September.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:9:p:426-:d:1483705
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    References listed on IDEAS

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