The Interrupted Power Law and the Size of Shadow Banking

12 Pages Posted: 18 Sep 2013 Last revised: 17 Apr 2014

See all articles by Davide Fiaschi

Davide Fiaschi

University of Pisa - Department of Economics

Imre Kondor

Parmenides Foundation

Matteo Marsili

Abdus Salam International Centre for Theoretical Physics (ICTP)

Valerio Volpati

Capital Fund Management

Date Written: September 16, 2013

Abstract

Using public data (Forbes Global 2000) we show that the asset sizes for the largest global firms follow a Pareto distribution in an intermediate range, that is "interrupted" by a sharp cut-off in its upper tail, where it is totally dominated by financial firms.

This flattening of the distribution contrasts with a large body of empirical literature which finds a Pareto distribution for firm sizes both across countries and over time.

Pareto distributions are generally traced back to a mechanism of proportional random growth, based on a regime of constant returns to scale. This makes our findings of an "interrupted" Pareto distribution all the more puzzling, because we provide evidence that financial firms in our sample should operate in such a regime.

We claim that the missing mass from the upper tail of the asset size distribution is a consequence of shadow banking activity and that it provides an (upper) estimate of the size of the shadow banking system. This estimate -- which we propose as a shadow banking index -- compares well with estimates of the Financial Stability Board until 2009, but it shows a sharper rise in shadow banking activity after 2010. Finally, we propose a proportional random growth model that reproduces the observed distribution, thereby providing a quantitative estimate of the intensity of shadow banking activity.

Keywords: Shadow Banking, Firm size distribution, Systemic financial stability

JEL Classification: F3, G15, G18

Suggested Citation

Fiaschi, Davide and Kondor, Imre and Marsili, Matteo and Volpati, Valerio, The Interrupted Power Law and the Size of Shadow Banking (September 16, 2013). Available at SSRN: https://ssrn.com/abstract=2326764 or http://dx.doi.org/10.2139/ssrn.2326764

Davide Fiaschi

University of Pisa - Department of Economics ( email )

Via Ridolfi 10
Pisa, PI 56124
Italy
00390502216208 (Phone)
00390502216384 (Fax)

HOME PAGE: http://www-dse.ec.unipi.it/persone/docenti/fiaschi/index.htm

Imre Kondor

Parmenides Foundation ( email )

Kirchplatz 1
Pullach
Munchen, 82049
Germany

Matteo Marsili (Contact Author)

Abdus Salam International Centre for Theoretical Physics (ICTP) ( email )

Strada Costiera 11
Trieste, 34014
Italy

Valerio Volpati

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France

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