Market Dynamics & Systemic Risk
Cambridge University; Harvard University
June 4, 2010
23rd Australasian Finance and Banking Conference 2010 Paper
This paper presents a possible solution to financial crises by addressing the core of the problem of systemic risk. To get there, it first illustrates a number of crises related situations before the definition of systemic risk is detailed. It then explains challenges of systemic risk and solutions on an institutional level before the consequences for micro- and macro- prudential regulation for the global financial system are set out.
As the definition of systemic risk presented is applicable to other areas, not only finance or economics, but any kind of system, as long as parts, relationships and interactions are clearly identifiable or definable, it can be seen as relevant to manage risk in the hemispheres of long-range health, unpredictable environment, complex high-tech/energy/resource competition, and even (international) politics of a society/world at large.
The systemic risk definition provided – the first operationalizable – takes a self-critical view with failure-reducing tendencies to be on the safe side if/when the results of our actions are unknown. It also operates the verbal level to avoid the aversion of policy makers regarding limited data-sets, over-simplified village-fair economies and limited model-proving/unrealistic assumptions.
It takes a value-based approach to ensure longevity and accounts for (non)rationality to ensure robustness in the face of (un)realized complexity, chaos, and intrinsicality/intangibility as far as possible even indirectly addressing the unknown unknowns.
Number of Pages in PDF File: 36
Keywords: Market Dynamics, Systemic Risk Definition, Regulatory Structure, Global Financial System, Systemic Crises, Financial Crisis, Macro-Prudential Regulation
JEL Classification: E50, E60, F00, F30, F40, G00, G10, G20, H00, H30, N20, P00, Z00
Date posted: June 4, 2010 ; Last revised: September 3, 2010
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