Risk Analysis of Conglomerates with Debt and Equity Links

Abstract: Studying the response of conglomerates to external shocks is a problem with important risk management and public policy implications. Conglomerates in this context refers to a group of companies that are interconnected via both equity and debt links, and share a common controlling entity. This paper presents: (1) an easy-to-implement numerical algorithm to assess the response of a conglomerate to an external shock to one of its components (subsidiaries); and (2) a standard protocol based on a set of five metrics that summarizes the overall resilience of a conglomerate. This novel set of metrics, in turn, offers two advantages. First, the metrics are useful to compare the strength of different conglomerates. And second, they are helpful to evaluate the relative merits of strategies aimed at improving the resilience of a given conglomerate either by altering its connectivity structure, or, the balance sheets of its components.

Keywords: Conglomerates; risk management; financial networks; financial strength; stress testing; simulation; systemic risk

Fecha de Publicación (online/ahead of print): 23 Septiembre, 2024.

Revista:  J. Risk Financial Manag. 2024, 17 (9), 426

Citación: Cifuentes A, Roman R. Risk Analysis of Conglomerates with Debt and Equity Links. Journal of Risk and Financial Management. 2024; 17(9):426. https://doi.org/10.3390/jrfm17090426

DOI: 10.3390/jrfm17090426

Página web de la publicación: https://www.mdpi.com/1911-8074/17/9/426