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Thursday, September 27, 2012
2:00 PM - 3:00 PM
T-DO Conference Room Bldg 123, Room 121

Postdoc Seminar

Market impact, overlapping portfolios and financial contagion

Fabio Caccioli
Santa Fe Institute

By means of a stylized model, we discuss the role of market impact and portfolio overlaps as a mechanism for stress propagation in financial networks. We present results of different stress tests, and in particular we consider the response of the system to (i) the presence of a toxic asset, (ii) the failure of a financial institution. Our analysis shows that the probability of financial contagion is a non-monotonic function of both the average diversification of financial institutions and market crowding, while more leverage increases the overall instability of the system. Moreover, the system is shown to exhibit a robust yet fragile'' behavior, with situations where the probability of contagion is very small but the whole system is shut down if contagion happens.

Host: Aric Hagberg, CNLS, 667-1444,