Transparency, Risk Management and International Financial Fragility

66 Pages Posted: 24 Jul 2003

See all articles by Mario Draghi

Mario Draghi

Goldman Sachs International

Francesco Giavazzi

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Robert C. Merton

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER); Harvard Business School - Finance Unit

Multiple version iconThere are 2 versions of this paper

Date Written: June 2, 2003

Abstract

Discussions of financial risk often fail to distinguish between risks that are consciously borne and those that are not. To understand the breeding conditions for financial crises the prime focus of concern should not be simply on large risk-taking per se, but on the unintended, or unanticipated accumulation of large risks by individuals, institutions or governments, often through the lack of knowledge or understanding of the risks by stakeholders and overseers of those entities. This paper analyses specific situations in which significant unanticipated and unintended financial risks are accumulated. It focuses, in particular, on the implicit guarantees that governments extend to banks and other financial institutions, which may result in the accumulation, often unconscious from the viewpoint of the government, of unanticipated risks in the balance sheet of the public sector. The paper also discusses how risk exposures can be measured, hedged and transferred through the use of derivatives, swap contracts, and other contractual agreements with specific reference to emerging markets.

Keywords: Risk Transparency, Macro-finance, Financial Crisis, Marco-risk Management, Sovereign Risk

JEL Classification: F3, G1, G2

Suggested Citation

Draghi, Mario and Giavazzi, Francesco and Merton, Robert C., Transparency, Risk Management and International Financial Fragility (June 2, 2003). Harvard Business School Working Paper No. 03-118; Harvard NOM Working Paper No. 03-41; HBS Finance Working Paper No. 03-118. Available at SSRN: https://ssrn.com/abstract=419220 or http://dx.doi.org/10.2139/ssrn.419220

Mario Draghi

Goldman Sachs International ( email )

Peterborough Court
133 Fleet Street
London, EC4A 2BB
United Kingdom
44.207.774.4377 (Phone)

Francesco Giavazzi

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3304 (Phone)
+39 02 5836 3302 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Robert C. Merton (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Avenue
E62-634
Cambridge, MA 02139-4307
United States
617 715 4866 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6678 (Phone)

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