Diversification disasters $

@inproceedings{Ibragimov2010DiversificationD,
  title={Diversification disasters \$},
  author={Rustam Ibragimov and Dwight M. Jaffee and Johan Walden},
  year={2010}
}
The recent financial crisis has revealed significant externalities and systemic risks that arise from the interconnectedness of financial intermediaries’ risk portfolios. We develop a model in which the negative externality arises because intermediaries’ actions to diversify that are optimal for individual intermediaries may prove to be suboptimal for society. We show that the externality depends critically on the distributional properties of the risks. The optimal social outcome involves less… CONTINUE READING

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