Big Banks, Idiosyncratic Volatility, and Systemic Risk

Ricardo T. Fernholz; Christoffer Koch

doi:10.1257/aer.p20171007

Big Banks, Idiosyncratic Volatility, and Systemic Risk

Ricardo T. Fernholz¹; Christoffer Koch²

¹ Robert Day School of Economics and Finance, Claremont McKenna College, 500 E. Ninth Street, Claremont, CA 91711 (e-mail: ) · ² Research Department, Federal Reserve Bank of Dallas, 2200 North Pearl Street, Dallas, TX 75201 (e-mail: )

American Economic Review 2017

Starting in the 1990s, US bank assets grew more concentrated among a few large institutions. We explore the changing role of idiosyncratic volatility as a shaping force of the bank asset power law distribution. Our results reveal that idiosyncratic asset volatilities for bank-holding companies declined since the 1990s. To the extent that firm-specific shocks can have significant macroeconomic consequences, this result implies that even as one obvious source of aggregate risk and contagion--bank asset concentration--has increased, another important source--idiosyncratic volatility--has diminished.

DOI: 10.1257/aer.p20171007
Volume: 107 (5)
Pages: 603-607
Language: en
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