Cross-ownership as a structural explanation for rising correlations in crisis times

Abstract

In this paper, we examine the interlinkages among firms through a financial network where crossholdings on both equity and debt are allowed. We relate mathematically the correlation among equities with the unconditional correlation of the assets, the values of their business assets and the sensitivity of the network, particularly the ∆-Greek. We noticed also this relation is independent of the Equities level. Besides, for the two-firms case, we analytically demonstrate that the equities correlation is always higher than the correlation of the assets; showing this issue by numerical illustrations. Finally, we study the relation between equity correlations and asset prices, where the model arrives to an increase in the former due to a fall in the assets.