In this paper, we study the implications of diversification in the asset portfolios of banks for financial stability and systemic risk. Adding to the existing literature, we analyse this issue in a network model of the interbank market. We carry out a simulation study that determines the probability of a systemic crisis in the banking network as a function of both the level of diversification, and the connectivity and structure of the financial network. In contrast to earlier studies we find that diversification at the level of individual banks may be beneficial for financial stability even if it does lead to a higher asset return correlation across banks.

The thesis presents a network model, where financial institutions form linkages at various investment horizons through their interdependence measured by volatility connectedness. Applying the novel framework of frequency connectedness mea- sures Baruník & Křehlík (2018), based on spectral representation of variance de- composition, we show fundamental properties of connectedness that originate in heterogeneous frequency responses to shocks. The newly proposed network mod- els characterize financial connections and systemic risk at the short-, medium- and long-term frequency. The empirical focus of this thesis is on the interde- pendence structure of US financial system, specifically, major U.S. banks in the period 2000 - 2016. In the light of frequency volatility connectedness measures, we argue that stocks with high levels of long-term connectedness represent greater systemic risk, because they are subject to persistent shocks transmitted for longer periods. When we assess institutions' risk premiums in asset pricing model, the model confirms the significance of volatility connectedness factor for asset prices. JEL Classification C18, C58, C58, G10, G15, Keywords connectedness, frequency, spectral analysis, sys- temic risk, financial network Author's e-mail 93539385@fsv.cuni.cz Supervisor's e-mail...

In this research project, we introduced an agent-based banking system based on systematic trust. The features of the model and attributes of the agents are defined and analyzed precisely, and the results are explained. Some of this model's features include but are not limited to considering the savings system, insurance deposits, the impact of the Central Bank loans, and correlated regional shocks in a banking system. Different Scenarios are applied. The results indicate that by having the Central Bank loans in the model, the banking system experience dramatically fewer failures. Even if some correlated regional shocks occur, the system can be more stable than when the Central Bank does not exist. Moreover, the trust system establishes and forms during different financial periods based on the bank's clients’ point of view about the bank's performance as an intelligent system to attract more capital for the system by providing some information for the agents to join the more prestigious banks. Conclusively, in the early financial periods, banks need more financial supports to support the clients’ deposits and to make their reputation for attracting more clients; hence the Central Bank is an essential parameter to help the banks to be more stable and supports the banks in their early stages of growth. The Central Bank loans would be significantly important in panic times, such as regional correlated preference shocks. / Thesis / Master of Science (MSc)

Submitted by Fernanda Corrêa Fernandes (ffernandes@fgvmail.br) on 2017-06-22T21:17:19Z No. of bitstreams: 1 Tese Arq.pdf: 1074006 bytes, checksum: 54d5b0fe4ae8e8358bfb2a68be8a60cb (MD5) / Approved for entry into archive by GILSON ROCHA MIRANDA (gilson.miranda@fgv.br) on 2017-06-27T14:31:36Z (GMT) No. of bitstreams: 1 Tese Arq.pdf: 1074006 bytes, checksum: 54d5b0fe4ae8e8358bfb2a68be8a60cb (MD5) / Made available in DSpace on 2017-07-04T19:21:59Z (GMT). No. of bitstreams: 1 Tese Arq.pdf: 1074006 bytes, checksum: 54d5b0fe4ae8e8358bfb2a68be8a60cb (MD5) Previous issue date: 2016-11-26 / This thesis is composed by two chapters. In the first one, I develop a framework to quantify the role of sectoral heterogeneity, with regard to credit access, in explaining the effects of financial integration. Financial frictions generate a misallocation of resources, implying a low total factor productivity and output per worker in emerging economies. Given the existence of sectoral heterogeneity in credit access, these frictions also have disproportionate effects on sectoral variables, as well as on exchange rate. These elements are able to explain some development regularities, as the higher relative price of tradable goods and the relative unproductive tradable goods sector in poor countries. Moreover, I show that domestic and external financial integration have different impacts on the economy. While the former is vital to reduce the misallocation of resources, the last is crucial to reduce the domestic interest rate and stimulate a deeper engagement of entrepreneurs in real activity. I quantify these results and show that financial integration has nontrivial effects on aggregate/sector-level productivity, capital accumulation and output per worker. In the second chapter, in turn, I analyse the propagation of shocks throughout a financial network, identifying the relation between heterogeneity of institutions and the resilience of the system. I distinguish banks according to their size and degree of centrality in order to form a core-periphery network, similar to those empirically observed. Regarding the effects of unexpected shocks, I argue that connections work as a way of propagation of losses and prove the possibility of contagion in equilibrium. Unlike the intuitive perception, I point out that a gap between the size of central and peripheral agents is required for the former to achieve the expected systemic relevance. When it occurs, the presence of core banks is crucial for easing the propagation of direct losses, as well as for protecting the system against peripheral shocks. The policy implications are clear in such cases. Monetary authorities do not need to rescue peripheral banks in order to avoid contagion. I conclude by analysing the relative resilience of some networks. I show that the core-periphery network is more resilient than the circular one. Since the last is mostly used, the contagion risk might be overestimated in literature. / Essa tese é composta por dois capítulos. No primeiro, desenvolvo um modelo para quantificar o papel da heterogeneidade setorial, em relação ao acesso a crédito, na determinação dos efeitos da integração financeira. Fricções financeiras geram má-alocação de recursos, resultando em baixa produtividade e produto por trabalhador em economias emergentes. Dada a existência de heterogeneidade setorial no acesso a crédito, essas fricções apresentam efeitos desproporcionais em variáveis setoriais, assim como na taxa de câmbio. Esses elementos são capazes de explicar regularidades do desenvolvimento, como o elevado preço relativo dos bens comercializáveis e a baixa produtividade relativa desse setor nos países em desenvolvimento. Adicionalmente, mostro que a integração doméstica e externa apresentam diferentes impactos na economia. Enquanto a primeira é vital para reduzir a má-alocação de recursos, a segunda é crucial para reduzir a taxa de juros doméstica e estimular um maior engajamento dos agentes na economia real. Quantifico esses resultados e mostro que a integração financeira apresenta efeitos não triviais na produtividade agregada/setorial, na acumulação de capital e no produto por trabalhador dos países. No segundo capítulo, por sua vez, analiso a propagação de choques por uma rede financeira, identificando a relação entre a heterogeneidade das instituições financeiras e a resiliência do sistema. Os bancos são diferenciados de acordo com seu tamanho e grau de centralidade na rede, de modo a formar uma rede núcleo-periferia similar às empiricamente observadas. Em relação aos efeitos de choques inesperados, mostro que as conexões funcionam como meio de propagação de perdas e provo a possibilidade de contágio em equilíbrio. Em contraste com a visão intuitiva, mostro que é necessária uma lacuna entre o tamanho do banco núcleo e periférico para que o primeiro alcance a relevância sistêmica esperada. Nesse caso, a presença de bancos núcleo é crucial para a propagação de choques que os atinjam diretamente, assim como para a proteção do sistema contra choques periféricos. As implicações de política são claras nesse caso. A autoridade monetária não precisa resgatar bancos periféricos para evitar o contágio. Por fim, analiso a resiliência relativa de algumas redes financeiras. Mostro que a rede núcleo-periferia é mais resiliente do que a rede circular. Como a última é utilizada recorrentemente, o risco de contágio pode estar superestimado na literatura.

This diploma thesis introduces the measures of network connectedness in the context of asset pricing. It proposes an asset pricing model in which the factor of connectedness is included as one of the risk factors together with the three Fama-French factors. The goal of the analysis is to examine whether the con- nectedness represents a signifcant risk factor that should be considered while determining the risk premium of the portfolio in diferent sectors in the market. Using the realized volatilities and returns of 496 assets of SP 500 index over the period 2005 - 2018, that are divided into 11 sectors, we frstly determine the linkages of connectedness between the assets in the same sector. Applying Fama-MacBeth two-step regression model, we explore the signifcance of the connectedness factor for the determination of the risk premium. We argue that the sector overall connectedness represents a signifcant risk in most of the sec- tors and should be therefore taken into account by the investors in all sectors. Moreover, the total directional connectedness that captures the spillover of shocks to one asset from the other assets in the sector, is a signifcant risk fac- tor that should increase the risk premium of the portfolio, especially in sectors such as the fnancial, health care, consumer...

This dissertation consists of three essays, each examining distinct dimensions of cross-sectional variation in exchange rate changes and currency returns conditional on macroeconomic variables. Chapter 2: Protectionism, Bilateral Integration, and the Cross-Section of Ex-change Rate Returns in US Presidential Debates We study the impact of US presidential election TV debates on intraday exchange rates of 96 currencies from 1996 to 2016. Expectations about protectionist measures are the main transmission channel of debate outcomes. Currencies of countries with high levels of bilateral foreign trade with the US depreciate if the election probability of the protectionist candidate increases during the debate. We rationalize our results in a model where a debate victory of a protectionist candidate raises expectations about future tariffs and reduces future net exports to the US, resulting in relative depreciation of currencies with high bilateral trade integration. Chapter 3: Global Portfolio Network and Currency Risk Premia External portfolio investments of countries can explain cross-sectional variation in currency risk premia. Using bilateral portfolio holdings of 26 countries from 2001 to 2021, I construct a network centrality measure where a country is central if it is integrated with key countries that account for a large share in the supply of tradeable financial assets. I find that currency excess returns and interest rates decrease in network centrality. The network centralities are persistent over time and offer a country-specific economic source of risk that are able to explain robust differences in currency risk premia. Empirical asset pricing tests show that the derived risk factor is priced in a cross-section of currency portfolios. Further, negative global shocks cause currencies of central countries to appreciate, while currencies of peripheral countries depreciate. I discuss the findings with implications of a consumption-based capital asset pricing model where central countries have lower consumption growth in high marginal utility states, resulting in an appreciation of their currencies. Chapter 4: FX Dealer Constraints and External Imbalances We study the impact of FX dealer banks' financial health on the cross-sectional variation of exchange rates. Using individual balance sheet information of 39 dealers, we derive an intermediary constraints index that captures the risk-bearing capacity of intermediaries. A deterioration of the solvency of dealer banks impairs their risk-bearing capacity and increases their marginal value of wealth. We test the theoretical prediction of Gabaix and Maggiori (2015) that tightening financial constraints of intermediaries are associated with increasing currency risk premia in the cross-section of the riskiness of currencies, as measured by the net foreign assets of countries. We combine dealer-specific risks to macroeconomic fundamentals of a cross-section of currencies, i.e., the indebtedness to foreigners measured by countries' net foreign assets. We show that currency excess returns increase with a country's external imbalances when constraints are relaxed, but debtor currencies experience a depreciation when constraints tighten.

La thèse traite de differents aspects des crises financières et de leur gestion par les régulateurs. Les systèmes financiers complexes, tel le réseau interbancaire, peuvent être modélisés par une approche de type réseau, pour calculer la propagation des faillites et modéliser le risque systémique. Partant d'un réseau d'agents identiquement capitalisés, l'impact d'un ratio de capitalisation est testé selon l'horizon de maximisation des profits des agents. Performante lorsque les agents optimisent en horizon infini, la prévention du risque systémique par ce ratio peut créer d'importants problèmes de liquidité lorsque les agents sont myopes. L'effet des taux d'intérêts sur les bulles de crédit est analysé en partant d'un modèle basé sur une économie de production, dans laquelle les entreprises font face à de rares opportunités d'investissement. Lorsqu'elles investissent, ces entreprises ont recours à de la dette court-terme, limitée à une partie de leur valeur boursière. Dans ce modèle générant des bulles sur les prix des firmes, les taux d'intérêts sur la dette n'ont que peu d'effets sur les prix des firmes. En outre, des réserves sont émises concernant la présence de véritables bulles dans les prix vis-à-vis des concepts historiques. Le précédent modèle est étendu en introduisant une part de dette à long-terme dans le capital des firmes. Dans ce cadre, les valeurs boursières des firmes sont très réactives au taux d'intérêt, étant même discontinues lors de chocs de taux persistants. Par ailleurs, l'économie de production peut atteindre un état bullier: les prix des firmes reflètent les gains de capital uniquement dus à la dette. / Complex financial systems, such as the interbank network, can be naturally captured using a network approach. This allows to calculate contamination of defaults and to model systemic risk. Our network is composed of identically capitalized agents. The effect of a capitalization ratio is determined depending on the maximization horizon of the agents: short-term, myopic or long-term. When agents optimize their payoffs in the long-run, the capitalization ratio is fully effective and prevents systemic risk. However, when agents adopt a myopic behavior, the capitalization ratio may trade systemic risk for liquidity scarcity. Starting from a production economy, in which firms face stochastic investment opportunities, we study the impact of the interest rates on bubbles in firms' prices. Capital of firms is exclusively made of equity, but when facing an investment opportunity, firms may borrow. Precisely, firms access short-term debts, and the amount of the debt is limited to a fraction of the price of their equities. This model seems to recreate bubbles on firms' prices. Unfortunately, interest rates do not affect prices to a large extent, and we may question whether prices of firms include a bubble component, with respect to the standard definition of bubbles: the discounted sum of the incoming cash flows. This previous model is extended by allowing firms to have a permanent debt. Actually, capital of firms is composed of equity and debt. In this case, firms' prices are very sensitive to interest rates, and may be discontinuous when interest rate shocks last over the periods. This model also exhibits a purely bubbly state: prices of firms only represent capitals profits generated by debts, there is no equity.