The Global Financial Crisis A Challenge for Risk Managers

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The Global Financial Crisis A Challenge for Risk Managers

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The Global Financial Crisis A Challenge for Risk Managers

  1. 1. The Global Financial Crisis A Challenge for Risk Managers Talk given at the International Disaster and Risk Conference Davos, 1 June 2010 Dr. Armin Haas
  2. 2. <ul><li>Dani Rodrik: Who murdered Wall Street? </li></ul>The Financial Crisis
  3. 3. <ul><li>German chancellor Heinrich Brüning: Memoirs </li></ul>The Financial Crisis of the 30ies
  4. 4. De-coupling of Financial & Real Economy
  5. 5. <ul><li>Some networks become instable once they cross specific levels of complexity/size </li></ul><ul><li>Could the financial crisis be simply due to this effect? </li></ul>Theory of Networks
  6. 6. We Do Not Comprehend the Financial System
  7. 7. <ul><li>Almost no models of systemic risk </li></ul><ul><li>Risk management in the financial sector without modells of systemic risks </li></ul><ul><li>Central banks use DSGE models without money, financial capital & assets </li></ul>We Do Not Comprehend the Financial System
  8. 8. <ul><li>Beno ît Mandelbrot </li></ul><ul><li>Interaction of financial agents brings about fat tails </li></ul>Fat Tails
  9. 9. <ul><li>„ Goldman Sachs has seen 25-standard-deviation moves several days in a row.“ David Viniar, chief financial officer, Goldman Sachs, 2007 </li></ul>Food-for-Thought
  10. 10. <ul><li>There is no way to detect asset price bubbles Alan Greenspan </li></ul>More Food-for-Thought
  11. 12. <ul><li>Endogenous dynamics: Mainstream buys => Hausse Mainstream sells => Baisse Tricky: Identifying the turning point </li></ul>The Game of Finance
  12. 13. <ul><li>Ideal: – Be bullish with the bull – Sell right before the bear strikes </li></ul>The Game of Finance II <ul><li>Real life: Blame game: – Sell, but bulls prevail => Maverick </li></ul><ul><li>=> You get blamed – Engaged when bear strikes => Mainstream => No blame </li></ul>
  13. 14. <ul><li>Capital markets alternate between two modes </li></ul><ul><li>Normal mode with stable covariance matrix </li></ul><ul><li>Exceptional mode => break down of covariance matrix </li></ul>Malevergne & Sornette <ul><li>=> Frequentistic risk management of Basel II style is erroneous! </li></ul>
  14. 15. <ul><li>Nicolas Taleb: Black Swans = Events no one can imagine </li></ul><ul><li>Didier Sornette: Dragon Kings = Rare events that result from endogenous dynamics of markets => imaginable/comprehensible/predictable (within limits) </li></ul>Black Swans and Dragon Kings
  15. 16. <ul><li>Look at the real financial world </li></ul>Integrated Financial Risk Governance <ul><li>Work towards a reasonable regulation for making financial markets more resilient </li></ul><ul><li>Investigate how risks are interrelated </li></ul><ul><li>Understand and model systemic risks </li></ul><ul><li>Build modells that are internally and externally consistent </li></ul>
  16. 17. <ul><li>Bayesian Risk Management => Mobilising experts‘ understanding of the financial system </li></ul>New Tools <ul><li>Socio-ecological systems => Modelling resilience </li></ul><ul><li>Agent-based computational economics lagom model family => Modelling the interaction of financial markets and the real economy </li></ul>
  17. 18. Trigger a Green Kondratiev Integrated Policy-Approach => Make the world more resilient => Narrow the gap between the financial and the real economy => Push world economy to higher real growth => Bring unemployed ressources into use => Absorb superflous financial capital
  18. 19. The Global Financial Crisis: A Challenge for Risk Managers Thank You for Your Attention!

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