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Financial Market Failures and Systemic Risk

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Author Info
Michel Aglietta
Abstract

In the last few years, a host of disturbances arose in a whole range of financial and derivative markets. I review a few episodes which exhibited huge increases of volatility and liquidity problems and which had a potential for spreading over, thus entailing systemic risk. Common lessons can be drawn from the episodes as far as sources of systemic risk are concerned. Three main factors conducive to potential spillover effects between markets stand out : destabilising price dynamics under conditions of stress, uncertainty about credit risk assessment, vulnerability to market liquidity shortfalls. Market illiquidity can force banks acting as market makers to rely on dynamic hedging and to effectively convey the liquidity gap from one market to another under the pressure of one-way selling. Numerous reasons account for the possibility of one-way selling in present day markets where competition is intense and price expectations are affected by complex parameters.

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Paper provided by CEPII research center in its series Working Papers with number 1996-01.

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Date of creation: Jan 1996
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Handle: RePEc:cii:cepidt:1996-01

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Related research
Keywords: FINANCIAL MARKET; RISK;

Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

References listed on IDEAS
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  1. Gregory R. Duffee, 1994. "On measuring credit risks of derivative instruments," Finance and Economics Discussion Series 94-27, Board of Governors of the Federal Reserve System (U.S.).
  2. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1995. "The Collapse of the Mexican Peso: What Have We Learned?," NBER Working Papers 5142, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Lionel Fontagne, 1995. "Why NAFTA Might Be Discriminatory," Working Papers 1995-12, CEPII research center. [Downloadable!]
  4. Paul H. Kupiec, 1995. "Techniques for verifying the accuracy of risk measurement models," Finance and Economics Discussion Series 95-24, Board of Governors of the Federal Reserve System (U.S.).
  5. Arturo Estrella, 1995. "Taylor, Black and Scholes: series approximations and risk management pitfalls," Research Paper 9501, Federal Reserve Bank of New York. [Downloadable!]
  6. Mishkin, Frederic S, 1994. "Preventing Financial Crises: An International Perspective," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 62(0), pages 1-40, Suppl..
    Other versions:
  7. Fernando Barran & Virginie Coudert & Benoit Mojon, 1994. "Transmission de la politique monetaire et credit bancaire, une application a 5 pays de l'OCDE," Working Papers 1994-03, CEPII research center. [Downloadable!]
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