Market efficient portfolios in a systemic economy

DOI10.1287/OPRE.2021.2172zbMATH Open1493.91109arXiv2003.10121OpenAlexW4205292832MaRDI QIDQ5080636FDOQ5080636

Authors: Kerstin Awiszus, Agostino Capponi, Stefan Weber 

Publication date: 31 May 2022

Published in: Operations Research (Search for Journal in Brave)

Abstract: We study the ex-ante minimization of market inefficiency, defined in terms of minimum deviation of market prices from fundamental values, from a centralized planner's perspective. Prices are pressured from exogenous trading actions of leverage targeting banks, which rebalance their portfolios in response to asset shocks. We characterize market inefficiency in terms of two key drivers, the banks' systemic significance and the statistical moments of asset shocks, and develop an explicit expression for the matrix of asset holdings which minimizes such inefficiency. Our analysis shows that to reduce inefficiencies, portfolio holdings should deviate more from a full diversification strategy if there is little heterogeneity in banks' systemic significance.

Full work available at URL: https://arxiv.org/abs/2003.10121

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zbMATH Keywords

market efficiencyfinancial engineeringprice pressureleverage targetingsystemic economysystemic significance

Mathematics Subject Classification ID

Portfolio theory (91G10)

Cites Work

• Systemic risk in financial systems
• Contagion in financial networks
• Measures of systemic risk
• A unified approach to systemic risk measures via acceptance sets
• Manipulation and the Allocational Role of Prices
• The joint impact of bankruptcy costs, fire sales and cross-holdings on systemic risk in financial networks
• An optimization view of financial systemic risk modeling: network effect and market liquidity effect
• Liability concentration and systemic losses in financial networks
• Suffocating Fire Sales

Cited In (3)

• Title not available (Why is that?)
• Bonus systems in an open portfolio.
• Analysis of Bank Leverage via Dynamical Systems and Deep Neural Networks

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