The Interrupted Power Law and the Size of Shadow Banking
Abstract
Using public data (Forbes Global 2000) we show that the asset sizes for the largest global firms follow a Pareto distribution in an intermediate range, that is ``interrupted'' by a sharp cut-off in its upper tail, where it is totally dominated by financial firms. This flattening of the distribution contrasts with a large body of empirical literature which finds a Pareto distribution for firm sizes both across countries and over time. Pareto distributions are generally traced back to a mechanism of proportional random growth, based on a regime of constant returns to scale. This makes our findings of an ``interrupted'' Pareto distribution all the more puzzling, because we provide evidence that financial firms in our sample should operate in such a regime. We claim that the missing mass from the upper tail of the asset size distribution is a consequence of shadow banking activity and that it provides an (upper) estimate of the size of the shadow banking system. This estimate -- which we propose as a shadow banking index -- compares well with estimates of the Financial Stability Board until 2009, but it shows a sharper rise in shadow banking activity after 2010. Finally, we propose a proportional random growth model that reproduces the observed distribution, thereby providing a quantitative estimate of the intensity of shadow banking activity.
- Publication:
-
PLoS ONE
- Pub Date:
- April 2014
- DOI:
- 10.1371/journal.pone.0094237
- arXiv:
- arXiv:1309.2130
- Bibcode:
- 2014PLoSO...994237F
- Keywords:
-
- Quantitative Finance - General Finance;
- Quantitative Finance - Statistical Finance
- E-Print:
- 12 pages, 5 figures, 2 tables. To appear in Plos ONE 2014