title: Reduction of Systemic Risk by Means of Pigouvian Taxation.
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.
authors.affiliation: Theoretical Physics Division, Rudjer Bošković Institute, P.O.Box 180, HR-10002 Zagreb, Croatia.
authors.forename: Vinko
authors.initials: V
authors.lastname: Zlatić
authors.affiliation: University of Siena, Department of Management and Law, Piazza S. Francesco, 53100 Siena, Italy; SDA Bocconi School of Management, via Bocconi 8, 20136 Milan, Italy.
authors.forename: Giampaolo
authors.initials: G
authors.lastname: Gabbi
authors.affiliation: Artes Calculi, Derenčinova 1, HR-10002 Zagreb, Croatia.
authors.forename: Hrvoje
authors.initials: H
authors.lastname: Abraham
mesh_terms: D005376:Financial Management; D007449:Investments; D011336:Probability; D040242:Risk Reduction Behavior; D013660:Taxes