Big Banks, Idiosyncratic Volatility, and Systemic Risk
Ricardo T. Fernholz, Christoffer Koch
American Economic Review · 2017 · Volume 107 · Issue 5
Abstract
Starting in the 1990s, US bank assets grew more concentrated among a few large institutions. We explore the changing role of idiosyncratic volatility as a shaping force of the bank asset power law distribution. Our results reveal that idiosyncratic asset volatilities for bank-holding companies declined since the 1990s. To the extent that firm-specific shocks can have significant macroeconomic consequences, this result implies that even as one obvious source of aggregate risk and contagion--bank asset concentration--has increased, another important source--idiosyncratic volatility--has diminished.
Keywords
Business Fluctuations, Cycles, Financial Markets and the Macroeconomy, Financial Crises, Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Production, Pricing, and Market Structure, Size Distribution of Firms
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