Understand
Common asset holding by financial institutions, namely portfolio overlap, is nowadays regarded as an important channel for financial contagion with the potential to trigger fire sales and thus severe losses at the systemic level.
- In this paper we propose a method to assess the statistical significance of the overlap between pairs of heterogeneously diversified portfolios, which then allows us to build a validated network of financial institutions where links indicate potential contagion channels due to realized portfolio overlaps.
- The method is implemented on a historical database of institutional holdings ranging from 1999 to the end of 2013, but can be in general applied to any bipartite network where the presence of similar sets of neighbors is of interest.
- We find that the proportion of validated network links (i.e., of statistically significant overlaps) increased steadily before the 2007-2008 global financial crisis and reached a maximum when the crisis occurred.