The Interrupted Power Law and The Size of Shadow Banking
AbstractUsing public data (Forbes Global 2000) we show that the asset sizes for the largest global firms follow a Pareto distribution in an intermediate range, that is ``interrupted'' by a sharp cut-off in its upper tail, where it is totally dominated by financial firms. This flattening of the distribution contrasts with a large body of empirical literature which finds a Pareto distribution for firm sizes both across countries and over time. Pareto distributions are generally traced back to a mechanism of proportional random growth, based on a regime of constant returns to scale. This makes our findings of an ``interrupted'' Pareto distribution all the more puzzling, because we provide evidence that financial firms in our sample should operate in such a regime. We claim that the missing mass from the upper tail of the asset size distribution is a consequence of shadow banking activity and that it provides an (upper) estimate of the size of the shadow banking system. This estimate -- which we propose as a shadow banking index -- compares well with estimates of the Financial Stability Board until 2009, but it shows a sharper rise in shadow banking activity after 2010. Finally, we propose a proportional random growth model that reproduces the observed distribution, thereby providing a quantitative estimate of the intensity of shadow banking activity.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1309.2130.
Date of creation: Sep 2013
Date of revision: Apr 2014
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David C. Wheelock & Paul W. Wilson, 2012. "Do Large Banks Have Lower Costs? New Estimates of Returns to Scale for U.S. Banks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 171-199, 02.
- Xavier Gabaix, 2008.
"Power Laws in Economics and Finance,"
NBER Working Papers
14299, National Bureau of Economic Research, Inc.
- Fujiwara, Yoshi, 2004. "Zipf law in firms bankruptcy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 337(1), pages 219-230.
- Zoltan Pozsar & Tobias Adrian & Adam Ashcraft & Hayley Boesky, 2010.
458, Federal Reserve Bank of New York.
- Davide Fiaschi - Marzia Romanelli, 2009.
"Nonlinear Dynamics in Welfare and the Evolution of World Inequality,"
2009/81, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
- Davide Fiaschi & Marzia Romanelli, 2009. "Nonlinear dynamics in welfare and the evolution of world inequality," Temi di discussione (Economic working papers) 724, Bank of Italy, Economic Research and International Relations Area.
- Jean-Philippe Bouchaud & Marc Mezard, 2000. "Wealth condensation in a simple model of economy," Science & Finance (CFM) working paper archive 500026, Science & Finance, Capital Fund Management.
- Tobias Adrian & Daniel Covitz & Nellie J. Liang, 2013.
"Financial stability monitoring,"
601, Federal Reserve Bank of New York.
- Bouchaud, Jean-Philippe & Mézard, Marc, 2000. "Wealth condensation in a simple model of economy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 282(3), pages 536-545.
- Carlos León & Clara Machado & Miguel Sarmiento, 2014.
"Identifying central bank liquidity super-spreaders in interbank funds networks,"
Borradores de Economia
816, Banco de la Republica de Colombia.
- Carlos León & Clara Machado & Miguel Sarmiento, 2014. "Identifying central bank liquidity super-spreaders in interbank funds networks," BORRADORES DE ECONOMIA 011187, BANCO DE LA REPÚBLICA.
- Carlos León, 2014.
"Scale-free tails in Colombian financial indexes: A primer,"
Borradores de Economia
812, Banco de la Republica de Colombia.
- Carlos León, 2014. "Scale-free tails in Colombian financial indexes: a primer," BORRADORES DE ECONOMIA 011144, BANCO DE LA REPÚBLICA.
- Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.