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Securities cross-holding in the Colombian financial system: a topological approach

Author

Listed:
  • Carlos León
  • Javier Miguélez

Abstract

Purpose - From a financial stability viewpoint, this paper aims to study cyclical interdependencies arising from the cross-holding of securities in the Colombian financial system. Design/methodology/approach - Cross-holding of securities in financial systems occurs when two financial institutions hold securities issued by each other or when more than two financial institutions hold securities issued by each other in a circular structure. Securities cross-holding is key for financial stability because of potential contagion arising from cyclical interdependencies in the connective architecture of financial systems. The presence of cyclical interdependencies is studied based on network analysis. The data set is a multilayer network that comprises bonds, certificates of deposit and equity issued and held by Colombian financial institutions from 2016 to 2019. Findings - Results show that the extent of securities’ cyclical interdependencies is particularly low and stable – even when cross-holding across different types of securities is considered. Research limitations/implications - The monetary value of exposures and their size with respect to financial institutions’ balance sheets are not considered. Studying the impact on the financial system’s solvency is a compulsory research path. Practical implications - The network topology suggests that increased potential contagion by cyclical interdependencies and feedback effects from securities cross-holding is rather limited. Originality/value - To the best of the authors’ knowledge, this is the first time that cyclical interdependencies arising from the securities cross-holding are studied. From a financial stability perspective, the methodology is general and promising for monitoring and analytical purposes.

Suggested Citation

  • Carlos León & Javier Miguélez, 2021. "Securities cross-holding in the Colombian financial system: a topological approach," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 38(4), pages 786-806, February.
    • Handle: RePEc:eme:sefpps:sef-10-2020-0398
    DOI: 10.1108/SEF-10-2020-0398
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    More about this item

    Keywords

    Networks; Reciprocity; Financial stability; Transitivity; Contagion; Securities; D85; L14; G32; G2;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G2 - Financial Economics - - Financial Institutions and Services

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