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Aaditya M. Iyer
Man Group, Man Investments Inc., 452 Fifth Avenue, 27th floor, New York, NY 10018, USA

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Journal article
Published: 17 August 2020 in Journal of Risk and Financial Management
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We address the paradox that financial innovations aimed at risk-sharing appear to have made the world riskier. Financial innovations facilitate hedging idiosyncratic risks among agents; however, aggregate risks can be hedged only with liquid assets. When risk-sharing is primitive, agents self-hedge and hold more liquid assets; this buffers aggregate risks, resulting in few correlated failures compared to when there is greater risk sharing. We apply this insight to build a model of a clearinghouse to show that as risk-sharing improves, aggregate liquidity falls but correlated failures rise. Public liquidity injections, for example, in the form of a lender-of-last-resort can reduce this systemic risk ex post, but induce lower ex-ante levels of private liquidity, which can in turn aggravate welfare costs from such injections.

ACS Style

Viral V. Acharya; Aaditya M. Iyer; Rangarajan K. Sundaram. Risk-Sharing and the Creation of Systemic Risk. Journal of Risk and Financial Management 2020, 13, 183 .

AMA Style

Viral V. Acharya, Aaditya M. Iyer, Rangarajan K. Sundaram. Risk-Sharing and the Creation of Systemic Risk. Journal of Risk and Financial Management. 2020; 13 (8):183.

Chicago/Turabian Style

Viral V. Acharya; Aaditya M. Iyer; Rangarajan K. Sundaram. 2020. "Risk-Sharing and the Creation of Systemic Risk." Journal of Risk and Financial Management 13, no. 8: 183.