Recently, the paper "Under-Diversification and Idiosyncratic Risk Externalities" by Professor Chao Zi, Assistant Professor of Finance at Shanghai Advanced Institute of Finance (SAIF) at Shanghai Jiao Tong University (SJTU), was published by the top international finance journalJournal of Financial Economics(JFE). Sponsored by the School of Business at the University of Rochester, JFE is one of the Top 3 international financial journals in the world, along withJournal of Finance(JF) andReview of Financial Studies(RFS). It's a peer-reviewed academic journal covering both theoretical and empirical types of research within financial economics.
The paper was co-authored by Professor Chao Zi, together with Dejanir Silva (Professor at the University of Illinois at Urbana-Champaign) and Felipe S. Iachan (Professor at the EPGE Finance School in Brazil). It focuses on the topic of "Under-Diversification and Idiosyncratic Risk Externalities" and yields targeted solutions.
By constructing a macro-financial model, the authors found that idiosyncratic uncertainty did cause underinvestment and excessive aggregate risk-taking, which had a significant impact upon welfare. They point out that optimal allocation could be implemented through financial regulation using a tax benefit on debt and risk-weighted capital requirements on financial intermediaries.
