IDEAS home Printed from https://ideas.repec.org/a/ris/jofitr/1468.html
   My bibliography  Save this article

How Homogeneous Diversification in Balanced Investment Funds Affects Portfolio and Systemic Risk

Author

Listed:
  • Ciciretti, Rocco

    () (University of Roma Tor Vergata)

  • Corvino, Raffaele

    () (Collegio Carlo Alberto)

Abstract

The recent financial crisis highlighted the dangers of systemic risk. In this regard no common view appears to exist on the definition, measurement, and real impact of systemic risk on the financial system. This paper aims to analyze the relationship between systemic risk and portfolio diversification, highlighting the differences between heterogeneous and homogeneous diversification. Diversification is generally accepted to be the main tool for reducing idiosyncratic or portfolio-specific financial risk, however homogeneous diversification also has implications for systemic risk. Using balanced investment funds data, the empirical analysis first investigates how diversification affects the two components of individual portfolio risk, namely systematic, and idiosyncratic risk, and then uses an estimation procedure to examine the change in asset allocation and its impact on global systemic risk. The results suggest that funds' portfolio diversification reduces at the same time the portfolio-specific risk and increasing the likelihood of a simultaneous collapse of financial institutions - given that a systemic event occurs.

Suggested Citation

  • Ciciretti, Rocco & Corvino, Raffaele, 2012. "How Homogeneous Diversification in Balanced Investment Funds Affects Portfolio and Systemic Risk," Journal of Financial Transformation, Capco Institute, vol. 34, pages 195-210.
  • Handle: RePEc:ris:jofitr:1468
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Arnaud Doucet & Vladislav Tadić, 2003. "Parameter estimation in general state-space models using particle methods," Annals of the Institute of Statistical Mathematics, Springer;The Institute of Statistical Mathematics, pages 409-422.
    2. repec:dau:papers:123456789/812 is not listed on IDEAS
    3. Vikas Agarwal, 2004. "Risks and Portfolio Decisions Involving Hedge Funds," Review of Financial Studies, Society for Financial Studies, pages 63-98.
    4. Antonio Diez De Los Rios & René Garcia, 2011. "Assessing and valuing the nonlinear structure of hedge fund returns," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(2), pages 193-212, March.
    5. Fung, William & Hsieh, David A., 1999. "A primer on hedge funds," Journal of Empirical Finance, Elsevier, pages 309-331.
    6. Amin, Gaurav S. & Kat, Harry M., 2003. "Hedge Fund Performance 1990–2000: Do the “Money Machines” Really Add Value?," Journal of Financial and Quantitative Analysis, Cambridge University Press, pages 251-274.
    7. Roncalli, Thierry & Teiletche, Jérôme, 2008. "An Alternative Approach to Alternative Beta," Journal of Financial Transformation, Capco Institute, vol. 24, pages 43-52.
    8. Gaurav Amin & Harry. M Kat, 2001. "Hedge Fund Performance 1990-2000- Do the "Money Machines" Really Add Value?," ICMA Centre Discussion Papers in Finance icma-dp2001-05, Henley Business School, Reading University, revised Sep 2001.
    9. Merton, Robert C, 1981. "On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts," The Journal of Business, University of Chicago Press, vol. 54(3), pages 363-406, July.
    10. Fung, W. & Hsieh, D A., 2007. "Hedge fund replication strategies: implications for investors and regulators," Financial Stability Review, Banque de France, pages 55-66.
    11. Fung, William & Hsieh, David A, 1997. "Empirical Characteristics of Dynamic Trading Strategies: The Case of Hedge Funds," Review of Financial Studies, Society for Financial Studies, pages 275-302.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Portfolio diversification; Asset class allocation; Systemic and systematic risk; Market crash;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

    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:ris:jofitr:1468. 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: (Prof. Shahin Shojai). General contact details of provider: http://www.capco.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.

    We have no references for this item. You can help adding them by using 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.

    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.