Financial instability transition under heterogeneous investments and portfolio diversification
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arXiv
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| Main Authors: | , , , , , |
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| Format: | Preprint |
| Published: |
2025
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| _version_ | 1866910807334322176 |
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| author | Forer, Preben Budnick, Barak Vivo, Pierpaolo Aufiero, Sabrina Bartolucci, Silvia Caccioli, Fabio |
| author_facet | Forer, Preben Budnick, Barak Vivo, Pierpaolo Aufiero, Sabrina Bartolucci, Silvia Caccioli, Fabio |
| contents | We analyze the stability of financial investment networks, where financial institutions hold overlapping portfolios of assets. We consider the effect of portfolio diversification and heterogeneous investments using a random matrix dynamical model driven by portfolio rebalancing. While heterogeneity generally correlates with heightened volatility, increasing diversification may have a stabilizing or destabilizing effect depending on the connectivity level of the network. The stability/instability transition is dictated by the largest eigenvalue of the random matrix governing the time evolution of the endogenous components of the returns, for which different approximation schemes are proposed and tested against numerical diagonalization. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2501_19260 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Financial instability transition under heterogeneous investments and portfolio diversification Forer, Preben Budnick, Barak Vivo, Pierpaolo Aufiero, Sabrina Bartolucci, Silvia Caccioli, Fabio Risk Management Disordered Systems and Neural Networks Physics and Society We analyze the stability of financial investment networks, where financial institutions hold overlapping portfolios of assets. We consider the effect of portfolio diversification and heterogeneous investments using a random matrix dynamical model driven by portfolio rebalancing. While heterogeneity generally correlates with heightened volatility, increasing diversification may have a stabilizing or destabilizing effect depending on the connectivity level of the network. The stability/instability transition is dictated by the largest eigenvalue of the random matrix governing the time evolution of the endogenous components of the returns, for which different approximation schemes are proposed and tested against numerical diagonalization. |
| title | Financial instability transition under heterogeneous investments and portfolio diversification |
| topic | Risk Management Disordered Systems and Neural Networks Physics and Society |
| url | https://arxiv.org/abs/2501.19260 |