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Systemic risk and financial regulations: A theoretical perspective

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.

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Acknowledgements

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

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1was professor of Economics at Middlebury College (USA). He received his PhD in economics from the University of California, Berkeley in 1992. He was a past President of the Association for Evolutionary Economics, and was on the Board of Directors for the Association for Social Economics. As well, he served on the Board of Editors of the Journal of Economic Issues and the Review of Political Economy, and was an Associate Fellow at CIRANO.

2interests include financial regulations, open macroeconomics and regional economics. He is Associate Professor of International Business at HEC Montréal (Canada). He held positions in several academic institutions (Middlebury College, USA; Polytechnique Montreal; Sun Yat Sen University, Guangzhou; Essec Business School, Paris; HEC Paris; UIBE, Beijing).

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Prasch, R., Warin, T. Systemic risk and financial regulations: A theoretical perspective. J Bank Regul 17, 188–199 (2016). https://doi.org/10.1057/jbr.2015.4

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Keywords

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