New Directions for Understanding Systemic Risk A Report on a Conference Cosponsored by the Federal Reserve Bank of New York and the National Academy of Sciences (2007) / Chapter Skim
Currently Skimming:
5 Concluding Observations
5 Concluding Observations
Pages 68-76
The Chapter Skim interface presents what we've algorithmically identified as the most significant single chunk of text within every page in the chapter.
Select key terms on the right to highlight them within pages of the chapter.
From page 68... ...
What opportunities exist to leverage this great interest from across many fields for the benefit of the central banks and financial authorities, the financial sector, and the nation's economy more generally? The conference explored this question by focusing on three principal issues associated with catastrophic events in complex systems: risk assessment, modeling and prediction, and mitigation and potential applications to policy.
|
From page 69... ...
Those who commented on stress testing acknowledged that a limitation of this approach is its assumption that behavior in the model does not change dramatically under extreme conditions. This assumption conflicts with what market participants in Chapter 1 of this volume vividly described as the feeling of regime shift during the events of 1997-98: the Asian currency crisis, the Russian default, and the Long-Term Capital Management collapse.
|
From page 70... ...
Central banks over the last two decades have increasingly devoted resources to research and analysis of financial stability. A major purpose of these efforts is to identify potential triggers of instability: events as well as market, policy, or institutional mechanisms that can generate instability or propagate it once the financial system is disrupted.
|
From page 71... ...
One can readily imagine adapting the kind of large-scale approaches undertaken by Haimes and Amin to model the financial system. So, one logically asks why academic economists have not pursued that line of research -- why they are not using such approaches to provide a foundation for understanding systemic risks.
|
From page 72... ...
Instead of transmission lines, transformers, and switches, financial markets have market makers, brokers, market utilities, beta providers, and individual investors with different strategies. Economists have known for thirty years that heterogeneity cannot be assumed away: In Micro Motives and Macro Behavior, Nobel Laureate Thomas Schelling provided many examples of how individual behaviors produced clustering and self-organization.
|
From page 73... ...
But a preponderance of information required to study systemic risk at some scale remains the proprietary information of financial institutions. The central bankers, regulators, and economists were impressed by the cooperative arrangements in the electrical power generating industry for sharing proprietary information used in researching and managing systemic stability and the insight gained from using detailed data.
|
From page 74... ...
That process may take weeks, as it did after the 1987 stock market crash, when even though prices rebounded sharply the next day, overall trading activity and international equity capital flows took about ten weeks to recover to normal levels. Or it may take longer, as it did after banks began writing down their real estate loans and selling them off in the early 1990s.
|
From page 75... ...
The markets were kept open, trading resumed, and the markets rose subsequently; the economy performed generally well despite the destruction of wealth associated with the initial stock price decline. Reinhart asserted that quick action is the right step to take, but there is not nearly as much research available to inform crisis management as there is to understand crisis propagation.
|
From page 76... ...
They were impressive, but in truth they never predicted very well, and many researchers eventually became disillusioned with some of those models. To arrive at a better understanding of systemic risk and to improve risk management tools and policies, the discussion pointed to the immense potential value from developing rich data sets of financial information, financial asset prices, and institutions' risks and earnings.
|
Key Terms
This material may be derived from roughly machine-read images, and so is provided only to facilitate research.
More
information on Chapter Skim is available.