Pricing Effects of Crossholdings in a Network Environment

19 Pages Posted: 19 Mar 2008

See all articles by Gorazd Brumen

Gorazd Brumen

University of Zurich - Swiss Banking Institute (ISB); Princeton University - Bendheim Center for Finance

Date Written: March 3, 2008

Abstract

We consider an economy of firms with cross-held securities. The value of the debt contract in such a network depends on the value of other debt contracts. This has the potential to induce contagion effects. The article proposes a Monte-Carlo algorithm to solve the problem of debt prices in an economy with crossholdings. As the number of firms in the network increases, debt yields increase only to a certain level, which we interpret as a measure of balance-sheet contagion. An increase in variance of the fundamental assets of one firm is almost totally absorbed within the debt yield of that firm. Heterogeneity of debt principals has the potential to induce large contagion effects.

Keywords: Crossholdings, network dependent securities pricing, market equilibrium with crossholdings

JEL Classification: G12, G20, C31, C02

Suggested Citation

Brumen, Gorazd, Pricing Effects of Crossholdings in a Network Environment (March 3, 2008). Available at SSRN: https://ssrn.com/abstract=1101937 or http://dx.doi.org/10.2139/ssrn.1101937

Gorazd Brumen (Contact Author)

University of Zurich - Swiss Banking Institute (ISB) ( email )

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CH-8032 Zurich, Zurich 8032
Switzerland
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HOME PAGE: http://www.gorazdbrumen.net

Princeton University - Bendheim Center for Finance ( email )

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Princeton, NJ 08540
United States

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