IDEAS home Printed from https://ideas.repec.org/a/gam/jrisks/v2y2014i3p260-276d37965.html
   My bibliography  Save this article

The Impact of Systemic Risk on the Diversification Benefits of a Risk Portfolio

Author

Listed:
  • Marc Busse

    () (SCOR SE, 26 General Guisan Quai, 8022 Zürich, Switzerland)

  • Michel Dacorogna

    () (SCOR SE, 26 General Guisan Quai, 8022 Zürich, Switzerland)

  • Marie Kratz

    () (ESSEC Business School Paris, CREAR, av. Bernard Hirsch BP 50105, 95021 Cergy-Pontoise Cedex, France)

Abstract

Risk diversification is the basis of insurance and investment. It is thus crucial to study the effects that could limit it. One of them is the existence of systemic risk that affects all of the policies at the same time. We introduce here a probabilistic approach to examine the consequences of its presence on the risk loading of the premium of a portfolio of insurance policies. This approach could be easily generalized for investment risk. We see that, even with a small probability of occurrence, systemic risk can reduce dramatically the diversification benefits. It is clearly revealed via a non-diversifiable term that appears in the analytical expression of the variance of our models. We propose two ways of introducing it and discuss their advantages and limitations. By using both VaR and TVaR to compute the loading, we see that only the latter captures the full effect of systemic risk when its probability to occur is low.

Suggested Citation

  • Marc Busse & Michel Dacorogna & Marie Kratz, 2014. "The Impact of Systemic Risk on the Diversification Benefits of a Risk Portfolio," Risks, MDPI, Open Access Journal, vol. 2(3), pages 1-17, July.
  • Handle: RePEc:gam:jrisks:v:2:y:2014:i:3:p:260-276:d:37965
    as

    Download full text from publisher

    File URL: http://www.mdpi.com/2227-9091/2/3/260/pdf
    Download Restriction: no

    File URL: http://www.mdpi.com/2227-9091/2/3/260/
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
    2. Martinez-Miera, David & Suarez, Javier, 2012. "A Macroeconomic Model of Endogenous Systemic Risk Taking," CEPR Discussion Papers 9134, C.E.P.R. Discussion Papers.
    3. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2017. "Measuring Systemic Risk," Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 2-47.
    4. repec:hal:journl:hal-00921283 is not listed on IDEAS
    5. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2010. "Econometric Measures of Systemic Risk in the Finance and Insurance Sectors," NBER Chapters,in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
    6. Rama Cont & Amal Moussa & Edson B Santos, 2013. "Network structure and systemic risk in banking systems," Post-Print hal-00912018, HAL.
    7. Darrell Duffie, 2013. "Systemic Risk Exposures: A 10-by-10-by-10 Approach," NBER Chapters,in: Risk Topography: Systemic Risk and Macro Modeling, pages 47-56 National Bureau of Economic Research, Inc.
    8. Philippe Artzner & Freddy Delbaen & Jean-Marc Eber & David Heath, 1999. "Coherent Measures of Risk," Mathematical Finance, Wiley Blackwell, vol. 9(3), pages 203-228.
    9. Susanne Emmer & Dirk Tasche, 2003. "Calculating credit risk capital charges with the one-factor model," Papers cond-mat/0302402, arXiv.org, revised Jan 2005.
    10. Susanne Emmer & Marie Kratz & Dirk Tasche, 2013. "What is the best risk measure in practice? A comparison of standard measures," Papers 1312.1645, arXiv.org, revised Apr 2015.
    11. Giglio, Stefano & Kelly, Bryan & Pruitt, Seth, 2016. "Systemic risk and the macroeconomy: An empirical evaluation," Journal of Financial Economics, Elsevier, vol. 119(3), pages 457-471.
    12. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Suzanne Emmer & Marie Kratz & Dirk Tasche, 2013. "What Is the Best Risk Measure in Practice? A Comparison of Standard Measures," Working Papers hal-00921283, HAL.
    2. Feng, Runhuan & Shimizu, Yasutaka, 2016. "Applications of central limit theorems for equity-linked insurance," Insurance: Mathematics and Economics, Elsevier, vol. 69(C), pages 138-148.
    3. repec:gam:jrisks:v:6:y:2018:i:2:p:61-:d:150249 is not listed on IDEAS
    4. Isshaq, Zangina & Faff, Robert, 2016. "Does the uncertainty of firm-level fundamentals help explain cross-sectional differences in liquidity commonality?," Journal of Banking & Finance, Elsevier, vol. 68(C), pages 153-161.

    More about this item

    Keywords

    diversification; expected shortfall; investment risk; insurance premium; risk loading; risk measure; risk management; risk portfolio; stochastic model; systemic risk; value-at-risk;

    JEL classification:

    • C - Mathematical and Quantitative Methods
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • K2 - Law and Economics - - Regulation and Business Law

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jrisks:v:2:y:2014:i:3:p:260-276:d:37965. 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: (XML Conversion Team). General contact details of provider: http://www.mdpi.com/ .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.