Can Portfolio Diversification Increase Systemic Risk? Evidence from the U.S and European Mutual Funds Market
30 Pages Posted: 12 Jul 2012
Date Written: July 11, 2012
This paper tests the hypothesis that portfolio diversification can increase the threat of systemic financial risk. The paper provides first a theoretical rationale for the possibility that systemic risk may be increased by the proliferation of financial instruments that lead operators to hold increasingly similar portfolios. Secondly, the paper tests the hypothesis that diversification may result in increasing systematic risk, by analyzing the portfolio dynamics of some of the major world open funds.
Keywords: portfolio diversification, financial stability, systemic risk, CAPM
JEL Classification: G01, G11, G32
Suggested Citation: Suggested Citation