Decomposing large banks' systemic trading losses

Do banks realize simultaneous trading losses because they invest in the same assets, or because different assets are subject to the same macro shocks? This paper decomposes the comovements of bank trading losses into two orthogonal channels: portfolio overlap and common shocks. While portfolio overlap generates strong comovements, I find that the sensitivity to common shocks from non-overlapping assets is larger. This sensitivity operates through two sub-channels: the short-long interest rate correlation and the stock-bond correlation, driven by macroeconomic factors. This reveals a new trade-off whereby reductions in portfolio overlap can increase the comovement of trading losses by adding exposures to macro shocks.