Portfolio Diversification, Leverage, and Financial Contagion
Electronic Access:
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Summary:
Models of “contagion” rely on market imperfections to explain why adverse shocks in one asset market might be associated with asset sales in many unrelated markets. This paper demonstrates that contagion can be explained with basic portfolio theory without recourse to market imperfections. It also demonstrates that “Value-at-Risk” portfolio management rules do not have significantly different consequences for portfolio rebalancing and contagion than other rules. The paper’s main conclusion is that portfolio diversification and leverage may be sufficient to explain why investors would find it optimal to sell many higher-risk assets when a shock to one asset occurs.
Series:
Working Paper No. 1999/136
Subject:
Econometric analysis Financial contagion Financial institutions Financial markets Financial sector policy and analysis National accounts Personal income Securities markets Stocks Vector autoregression
English
Publication Date:
October 1, 1999
ISBN/ISSN:
9781451855791/1018-5941
Stock No:
WPIEA1361999
Pages:
38
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