Synchronicity and Fragility

62 Pages Posted: 24 Sep 2020 Last revised: 30 Nov 2022

See all articles by Itay Goldstein

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ; National Bureau of Economic Research (NBER)

Alexandr Kopytov

The University of Hong Kong - Faculty of Business and Economics

Lin Shen

INSEAD

Haotian Xiang

Guanghua School of Management, Peking University

Multiple version iconThere are 2 versions of this paper

Date Written: November 28, 2022

Abstract

We show that the correlation across financial institutions is a major force that increases their overall fragility. Our model features a financial system with banks individually prone to runs and interconnected through fire sales. Strategic complementarities within and across banks amplify each other, and this causes the correlation in their risks to be a key factor driving the fragility of each bank and the system as a whole. Reducing asset commonality and improving bank-specific disclosure alleviate fragility through desynchronizing runs across banks. Secondary market liquidity injections have a significant stabilizing effect through synchronicity reduction on top of their direct effect.

JEL Classification: G01, G21, G28

Suggested Citation

Goldstein, Itay and Kopytov, Alexandr and Shen, Lin and Xiang, Haotian, Synchronicity and Fragility (November 28, 2022). Available at SSRN: https://ssrn.com/abstract=3683725 or http://dx.doi.org/10.2139/ssrn.3683725

Itay Goldstein

University of Pennsylvania - The Wharton School - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0499 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexandr Kopytov (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Lin Shen

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Haotian Xiang

Guanghua School of Management, Peking University ( email )

Beijing
China

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