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Systemic Risk and Portfolio Diversification: Evidence from the Futures Market

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  • Radoslav Raykov

Abstract

This paper explores the extent to which correlated investments in the futures market concentrated systemic risk on large Canadian banks around the 2008 crisis. We find that core banks took positions against the periphery, increasing their systemic risk as a group. On the portfolio level, position similarity was the main systemic risk driver for core banks, while cross-price correlations drove the systemic risk of noncore banks. Core banks were more diversified, but their portfolios also overlapped more. By contrast, non-core banks were less diversified, but also overlapped less. This significantly nuances the debate on concentration versus diversification as systemic risk sources.

Suggested Citation

  • Radoslav Raykov, 2021. "Systemic Risk and Portfolio Diversification: Evidence from the Futures Market," Staff Working Papers 21-50, Bank of Canada.
    • Handle: RePEc:bca:bocawp:21-50
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial institutions; Financial markets;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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