Risk externalities and too big to fail
This paper establishes the case for a fallacy of economies of scale in large aggregate institutions and the effects of scale risks. The problem of rogue trading and excessive risk taking is taken as a case example. Assuming (conservatively) that a firm exposure and losses are limited to its capital while external losses are unbounded, we establish a condition for a firm not to be allowed to be too big to fail. In such a case, the expected external losses second derivative with respect to the firm capital at risk is positive. Examples and analytical results are obtained based on simplifying assumptions and focusing exclusively on the risk externalities that firms too big to fail can have.
Volume (Year): 389 (2010)
Issue (Month): 17 ()
|Contact details of provider:|| Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/|
References listed on IDEAS
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.:
- Fujiwara, Yoshi, 2004. "Zipf law in firms bankruptcy," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 337(1), pages 219-230.
- Taleb, Nassim Nicholas, 2009. "Errors, robustness, and the fourth quadrant," International Journal of Forecasting, Elsevier, vol. 25(4), pages 744-759, October.
- Tapiero, Charles S., 2007. "Consumers risk and quality control in a collaborative supply chain," European Journal of Operational Research, Elsevier, vol. 182(2), pages 683-694, October.
- Okuyama, K & Takayasu, M & Takayasu, H, 1999. "Zipf's law in income distribution of companies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 269(1), pages 125-131.
- Saito, Yukiko Umeno & Watanabe, Tsutomu & Iwamura, Mitsuru, 2007.
"Do larger firms have more interfirm relationships?,"
Physica A: Statistical Mechanics and its Applications,
Elsevier, vol. 383(1), pages 158-163.
- SAITO (UMENO) Yukiko & WATANABE Tsutomu & IWAMURA Mitsuru, 2007. "Do Larger Firms Have More Interfirm Relationships?," Discussion papers 07028, Research Institute of Economy, Trade and Industry (RIETI).
- Aleksiejuk, Agata & Hołyst, Janusz A., 2001. "A simple model of bank bankruptcies," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 198-204.
When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:389:y:2010:i:17:p:3503-3507. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dana Niculescu)
If references are entirely missing, you can add them using this form.