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The Interrupted Power Law and The Size of Shadow Banking

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  • Davide Fiaschi
  • Imre Kondor
  • Matteo Marsili

Abstract

Using public data (Forbes Global 2000) we show that the distribution of asset sizes for the largest global firms follows a Pareto distribution in an intermediate range that is "interrupted" by a sharp cutoff in its upper tail, which is totally dominated by financial firms. This 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 evidence 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 estimate of the size of the shadow banking system. This estimate - that 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.

Suggested Citation

  • Davide Fiaschi & Imre Kondor & Matteo Marsili, 2013. "The Interrupted Power Law and The Size of Shadow Banking," Discussion Papers 2013/166, Dipartimento di Economia e Management (DEM), University of Pisa, Pisa, Italy.
  • Handle: RePEc:pie:dsedps:2013/166
    Note: ISSN 2039-1854
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    Cited by:

    1. León, C., 2015. "Financial stability from a network perspective," Other publications TiSEM bb2e4e44-e842-45c6-a946-4, Tilburg University, School of Economics and Management.
    2. León, Carlos & Machado, Clara & Sarmiento, Miguel, 2018. "Identifying central bank liquidity super-spreaders in interbank funds networks," Journal of Financial Stability, Elsevier, vol. 35(C), pages 75-92.
    3. Carlos León, 2014. "Scale-free tails in Colombian financial indexes: A primer," Borradores de Economia 812, Banco de la Republica de Colombia.
    4. Carlos Serrano-Cinca & Begoña Gutiérrez-Nieto & Luz López-Palacios, 2015. "Determinants of Default in P2P Lending," PLOS ONE, Public Library of Science, vol. 10(10), pages 1-22, October.
    5. Davide Fiaschi & Imre Kondor & Matteo Marsili & Valerio Volpati, 2016. "The missing assets and the size of Shadow Banking: an update," Papers 1611.02760, arXiv.org.
    6. Adrian, Tobias & Breuer, Peter & Ashcraft, Adam & Cetorelli, Nicola, 2018. "A Review of Shadow Banking," CEPR Discussion Papers 13363, C.E.P.R. Discussion Papers.
    7. Gianfranco Battisti, 2014. "SHADOW BANKING - A Geographical Interpretation," ERSA conference papers ersa14p642, European Regional Science Association.
    8. Tobias Adrian & Adam B. Ashcraft & Nicola Cetorelli, 2013. "Shadow bank monitoring," Staff Reports 638, Federal Reserve Bank of New York.

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