Financial Market Structure and Risk Concentration

51 Pages Posted: 22 Mar 2021 Last revised: 5 Aug 2022

See all articles by Briana Chang

Briana Chang

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Shengxing Zhang

Peking University HSBC Business School; London School of Economics (LSE) - Department of Economics

Date Written: August 5, 2022

Abstract

We propose a framework that jointly determines bilateral trading networks and risk allocation between banks. Banks use their bilateral connections to share and concentrate their exposures to idiosyncratic risks. Even when banks are ex-ante homogeneous and risk-averse, they may take risks collectively by concentrating risks on a small set of banks. A structural shift in the market structure in response to a small change in fundamentals and regulations is possible, causing discontinuous changes in aggregate risks and transaction prices. The framework is useful for deriving implications of financial market structure on asset price and bank size distribution and evaluating the responses of the market structure to regulations.

Keywords: Network, Over-the-Counter Market, Regulations

JEL Classification: C70, G1, G20

Suggested Citation

Chang, Briana and Zhang, Shengxing, Financial Market Structure and Risk Concentration (August 5, 2022). Available at SSRN: https://ssrn.com/abstract=3808072 or http://dx.doi.org/10.2139/ssrn.3808072

Briana Chang (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States

Shengxing Zhang

Peking University HSBC Business School ( email )

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

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