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Reduction of systemic risk by means of Pigouvian taxation

Zlatić, Vinko; Gabbi, Giampaolo; Abraham, Hrvoje (2015) Reduction of systemic risk by means of Pigouvian taxation. PLoS ONE, 10 (7). e0114928/1-e0114928/18. ISSN 1932-6203

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Abstract

We analyze the possibility of reduction of systemic risk in financial markets through Pigouvian taxation of financial institutions, which is used to support the rescue fund. We introduce the concept of the cascade risk with a clear operational definition as a subclass and a network related measure of the systemic risk. Using financial networks constructed from real Italian money market data and using realistic parameters, we show that the cascade risk can be substantially reduced by a small rate of taxation and by means of a simple strategy of the money transfer from the rescue fund to interbanking market subjects. Furthermore, we show that while negative effects on the return on investment (ROI) are direct and certain, an overall positive effect on risk adjusted return on investments (ROIRA) is visible. Please note that the taxation is introduced as a monetary/regulatory, not as a _scal measure, as the term could suggest. The rescue fund is implemented in a form of a common reserve fund.

Item Type: Article
Uncontrolled Keywords: Pigouvian taxation; rescue fund; ROI
Subjects: SOCIAL SCIENCES > Economics
Divisions: Theoretical Physics Division
Projects:
Project titleProject leaderProject codeProject type
Forecasting Financial Crises-FOC-IIUNSPECIFIED255987FP7
Foundational Research on MULTIlevel comPLEX networks and systems-MULTIPLEXUNSPECIFIED317532FP7
Depositing User: Vinko Zlatić
Date Deposited: 29 Apr 2016 14:32
Last Modified: 29 Apr 2016 14:32
URI: http://fulir.irb.hr/id/eprint/2774
DOI: 10.1371/journal.pone.0114928

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