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Journal of Banking Regulation

, Volume 17, Issue 3, pp 188–199 | Cite as

Systemic risk and financial regulations: A theoretical perspective

  • Robert Prasch
  • Thierry Warin
Original Article

Abstract

This article inserts the notion of systemic risk into the theoretical foundations of modern finance. By systemic risk, we mean risks because of interdependence among leading firms, in other words complexity. It builds upon the traditional mean-variance approach while reconsidering an inadequately contemplated source of risk: the actual organization of the financial market. As such, we take seriously the idea that some oligopolistic firms may be understood by market participants to be central to the fabric of modern financial markets, and in that sense can be deemed too big to fail. While we believe that much of traditional financial analysis is valid in its own terms, we also believe that important insights can be acquired from melding Modern Portfolio Theory with recent developments in Industrial Organization.

Keywords

systemic risk specific risk systematic risk modern portfolio theory complexity financial regulations 

Notes

Acknowledgements

Vice-President at CIRANO (Canada). The authors would like to thank Cirano (Canada). The usual caveats apply.

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Copyright information

© Palgrave Macmillan, a division of Macmillan Publishers Ltd 2015

Authors and Affiliations

  • Robert Prasch
  • Thierry Warin
    • 1
  1. 1.Department of International BusinessCanada

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