Networks of Common Asset Holdings: Aggregation and Measures of Vulnerability

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• Minca, A (Cornell University)
• Thursday 25 September 2014, 11:30-12:15
• Seminar Room 1, Newton Institute.

If you have a question about this talk, please contact Mustapha Amrani.

Systemic Risk: Mathematical Modelling and Interdisciplinary Approaches

Co-author : Anton BRAVERMAN (Cornell)

This paper quantifies the interrelations induced by common asset holdings among financial institutions. A network representation emerges, where nodes represent portfolios and edge weights aggregate the common asset holdings and the liquidity of these holdings. As a building block, we introduce a simple model of order imbalance that estimates price impacts due to liquidity shocks. In our model, asset prices are set by a competitive risk-neutral market maker and the arrival rates for the buyers and sellers depend on the common asset holdings. We illustrate the relevance of our aggregation method and the resulting network representation using data on mutual fund asset holdings. We introduce three related measures of vulnerability in the network and demonstrate a strong dependence between mutual fund returns and these measures.

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

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