Risk externalities and too big to fail |
| |
Authors: | Nassim N. Taleb |
| |
Affiliation: | Department of Finance and Risk Engineering, The Research Center for Risk Engineering, New York University Polytechnic Institute, 11201 New York, United States |
| |
Abstract: | This paper establishes the case for a fallacy of economies of scale in large aggregate institutions and the effects of scale risks. The problem of rogue trading and excessive risk taking is taken as a case example. Assuming (conservatively) that a firm exposure and losses are limited to its capital while external losses are unbounded, we establish a condition for a firm not to be allowed to be too big to fail. In such a case, the expected external losses second derivative with respect to the firm capital at risk is positive. Examples and analytical results are obtained based on simplifying assumptions and focusing exclusively on the risk externalities that firms too big to fail can have. |
| |
Keywords: | Risk management Tail risks Corporate finance Quantitative finance |
本文献已被 ScienceDirect 等数据库收录! |
|