Can Portfolio Diversification Increase Systemic Risk?: Evidence from the US and European Mutual Funds Market
The IUP Journal of Financial Risk Management, Vol. IX, No. 4, pp. 52-76, December 2012
Posted: 12 Dec 2012
Date Written: December 11, 2012
This paper tests the hypothesis that portfolio diversification can increase the threat of systemic financial risk. The paper first provides 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 the systemic risk by analyzing the portfolio dynamics of some of the major world open funds.
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