Systemic Portfolio Diversification

44 Pages Posted: 23 Mar 2019 Last revised: 8 Mar 2021

See all articles by Agostino Capponi

Agostino Capponi

Columbia University

Marko Weber

National University of Singapore (NUS) - Department of Mathematics

Date Written: March 8, 2021


We study the portfolio allocation problem of banks in the presence of fire-sale spillovers. We show that the joint portfolio selection problem may be framed as a potential game, and prove the existence of an equilibrium outcome. Our analysis suggests that while sacrificing individual diversification benefits to reduce portfolio commonality increases the probability that a sale occurs, it also lowers the probability of a costly widespread sell-off. We prove that if heterogeneity in leverage is higher, banks have stronger incentives to achieve systemic diversification. This in turn reduces the expected aggregate vulnerability of the system.

Keywords: systemic diversification, leverage, fire-sale externalities, aggregate vulnerability

JEL Classification: G01, G21, G38

Suggested Citation

Capponi, Agostino and Weber, Marko, Systemic Portfolio Diversification (March 8, 2021). Available at SSRN: or

Agostino Capponi (Contact Author)

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

Marko Weber

National University of Singapore (NUS) - Department of Mathematics ( email )

Department of Mathematics
Singapore, 117543

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