IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v13y2021i2p857-d481545.html
   My bibliography  Save this article

Robust Management of Systemic Risks and Food-Water-Energy-Environmental Security: Two-Stage Strategic-Adaptive GLOBIOM Model

Author

Listed:
  • Tatiana Ermolieva

    (International Institute for Applied Systems Analysis, Laxenburg 2361, Austria)

  • Petr Havlik

    (International Institute for Applied Systems Analysis, Laxenburg 2361, Austria)

  • Yuri Ermoliev

    (International Institute for Applied Systems Analysis, Laxenburg 2361, Austria)

  • Nikolay Khabarov

    (International Institute for Applied Systems Analysis, Laxenburg 2361, Austria)

  • Michael Obersteiner

    (International Institute for Applied Systems Analysis, Laxenburg 2361, Austria)

Abstract

Critical imbalances and threshold exceedances can trigger a disruption in a network of interdependent systems. An insignificant-at-first-glance shock can induce systemic risks with cascading catastrophic impacts. Systemic risks challenge traditional risk assessment and management approaches. These risks are shaped by systemic interactions, risk exposures, and decisions of various agents. The paper discusses the need for the two-stage stochastic optimization (STO) approach that enables the design of a robust portfolio of precautionary strategic and operational adaptive decisions that makes the interdependent systems flexible and robust with respect to risks of all kinds. We established a connection between the robust quantile-based non-smooth estimation problem in statistics and the two-stage non-smooth STO problem of robust strategic–adaptive decision-making. The coexistence of complementary strategic and adaptive decisions induces systemic risk aversion in the form of Value-at-Risk (VaR) quantile-based risk constraints. The two-stage robust decision-making is implemented into a large-scale Global Biosphere Management (GLOBIOM) model, showing that robust management of systemic risks can be addressed by solving a system of probabilistic security equations. Selected numerical results emphasize that a robust combination of interdependent strategic and adaptive solutions presents qualitatively new policy recommendations, if compared to a traditional scenario-by-scenario decision-making analysis.

Suggested Citation

  • Tatiana Ermolieva & Petr Havlik & Yuri Ermoliev & Nikolay Khabarov & Michael Obersteiner, 2021. "Robust Management of Systemic Risks and Food-Water-Energy-Environmental Security: Two-Stage Strategic-Adaptive GLOBIOM Model," Sustainability, MDPI, vol. 13(2), pages 1-16, January.
  • Handle: RePEc:gam:jsusta:v:13:y:2021:i:2:p:857-:d:481545
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/13/2/857/pdf
    Download Restriction: no

    File URL: https://www.mdpi.com/2071-1050/13/2/857/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. J. Germer & J. Sauerborn, 2008. "Estimation of the impact of oil palm plantation establishment on greenhouse gas balance," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 10(6), pages 697-716, December.
    2. Y.M. Ermoliev & T.Y. Ermolieva & G.J. MacDonald & V.I. Norkin, 2000. "Stochastic Optimization of Insurance Portfolios for Managing Exposure to Catastrophic Risks," Annals of Operations Research, Springer, vol. 99(1), pages 207-225, December.
    3. Liu, Junguo & Williams, Jimmy R. & Zehnder, Alexander J.B. & Yang, Hong, 2007. "GEPIC - modelling wheat yield and crop water productivity with high resolution on a global scale," Agricultural Systems, Elsevier, vol. 94(2), pages 478-493, May.
    4. Nelson, Gerald C. & Rosegrant, Mark W. & Koo, Jawoo & Robertson, Richard & Sulser, Timothy & Zhu, Tingju & Ringler, Claudia & Msangi, Siwa & Palazzo, Amanda & Batka, Miroslav & Magalhaes, Marilia & Va, 2009. "Climate change: Impact on agriculture and costs of adaptation," Food policy reports 21, International Food Policy Research Institute (IFPRI).
    5. Messner, S. & Golodnikov, A. & Gritsevskii, A., 1996. "A stochastic version of the dynamic linear programming model MESSAGE III," Energy, Elsevier, vol. 21(9), pages 775-784.
    6. Deaton, Angus & Laroque, Guy, 1996. "Competitive Storage and Commodity Price Dynamics," Journal of Political Economy, University of Chicago Press, vol. 104(5), pages 896-923, October.
    7. Emilio Cano & Javier Moguerza & Tatiana Ermolieva & Yuri Ermoliev, 2014. "Energy efficiency and risk management in public buildings: strategic model for robust planning," Computational Management Science, Springer, vol. 11(1), pages 25-44, January.
    8. Danielson, Mats & Ekenberg, Love, 1998. "A framework for analysing decisions under risk," European Journal of Operational Research, Elsevier, vol. 104(3), pages 474-484, February.
    9. Yuri Ermoliev & Detlof Winterfeldt, 2012. "Systemic Risk and Security Management," Lecture Notes in Economics and Mathematical Systems, in: Yuri Ermoliev & Marek Makowski & Kurt Marti (ed.), Managing Safety of Heterogeneous Systems, edition 127, pages 19-49, Springer.
    10. Ermoliev, Y. & Ermolieva, T. & Fischer, G. & Makowski, M. & Nilsson, S. & Obersteiner, M., 2008. "Discounting, catastrophic risks management and vulnerability modeling," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(4), pages 917-924.
    11. Kurt Marti, 2005. "Stochastic Optimization Methods," Springer Books, Springer, number 978-3-540-26848-2, October.
    12. Kurt Marti & Yuri Ermoliev & Marek Makowski & Georg Pflug, 2006. "Coping with Uncertainty," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-540-35262-4, July.
    13. Andrei Gritsevskyi & Yuri Ermoliev, 2012. "Modeling Technological Change Under Increasing Returns and Uncertainty," Lecture Notes in Economics and Mathematical Systems, in: Yuri Ermoliev & Marek Makowski & Kurt Marti (ed.), Managing Safety of Heterogeneous Systems, edition 127, pages 109-136, Springer.
    14. Tatiana Ermolieva & Yuri Ermoliev & Guenther Fischer & Istvan Galambos, 2003. "The Role of Financial Instruments in Integrated Catastrophic Flood Management," Multinational Finance Journal, Multinational Finance Journal, vol. 7(3-4), pages 207-230, September.
    15. Lian Pin Koh & David S. Wilcove, 2007. "Cashing in palm oil for conservation," Nature, Nature, vol. 448(7157), pages 993-994, August.
    16. Y. Ermoliev & L. Hordijk, 2006. "Facets of Robust Decisions," Lecture Notes in Economics and Mathematical Systems, in: Coping with Uncertainty, pages 3-28, Springer.
    17. Glasserman, Paul & Young, H. Peyton, 2015. "How likely is contagion in financial networks?," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 383-399.
    18. Gritsevskyi, Andrii & Nakicenovi, Nebojsa, 2000. "Modeling uncertainty of induced technological change," Energy Policy, Elsevier, vol. 28(13), pages 907-921, November.
    19. Havlík, Petr & Schneider, Uwe A. & Schmid, Erwin & Böttcher, Hannes & Fritz, Steffen & Skalský, Rastislav & Aoki, Kentaro & Cara, Stéphane De & Kindermann, Georg & Kraxner, Florian & Leduc, Sylvain & , 2011. "Global land-use implications of first and second generation biofuel targets," Energy Policy, Elsevier, vol. 39(10), pages 5690-5702, October.
    20. Tatiana Ermolieva & Petr Havlík & Yuri Ermoliev & Aline Mosnier & Michael Obersteiner & David Leclère & Nikolay Khabarov & Hugo Valin & Wolf Reuter, 2016. "Integrated Management of Land Use Systems under Systemic Risks and Security Targets: A Stochastic Global Biosphere Management Model," Journal of Agricultural Economics, Wiley Blackwell, vol. 67(3), pages 584-601, September.
    21. Junlian Gao & Xiangyang Xu & Guiying Cao & Yurii M. Ermoliev & Tatiana Y. Ermolieva & Elena A. Rovenskaya, 2018. "Optimizing Regional Food and Energy Production under Limited Water Availability through Integrated Modeling," Sustainability, MDPI, vol. 10(6), pages 1-12, May.
    22. John M. Mulvey & Robert J. Vanderbei & Stavros A. Zenios, 1995. "Robust Optimization of Large-Scale Systems," Operations Research, INFORMS, vol. 43(2), pages 264-281, April.
    23. Oleksandra Borodina & Elena Borodina & Tatiana Ermolieva & Yuri Ermoliev & Günther Fischer & Marek Makowski & Harrij Velthuizen, 2012. "Sustainable Agriculture, Food Security, and Socio-Economic Risks in Ukraine," Lecture Notes in Economics and Mathematical Systems, in: Yuri Ermoliev & Marek Makowski & Kurt Marti (ed.), Managing Safety of Heterogeneous Systems, edition 127, pages 169-185, Springer.
    24. Andrew G. Haldane & Robert M. May, 2011. "Systemic risk in banking ecosystems," Nature, Nature, vol. 469(7330), pages 351-355, January.
    25. Paul Glasserman & Peyton Young, 2015. "Contagion in Financial Networks," Economics Series Working Papers 764, University of Oxford, Department of Economics.
    26. J. Pablo Ortiz-Partida & Taher Kahil & Tatiana Ermolieva & Yuri Ermoliev & Belize Lane & Samuel Sandoval-Solis & Yoshihide Wada, 2019. "A Two-Stage Stochastic Optimization for Robust Operation of Multipurpose Reservoirs," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 33(11), pages 3815-3830, September.
    27. B. O’Neill & Y. Ermoliev & T. Ermolieva, 2006. "Endogenous Risks and Learning in Climate Change Decision Analysis," Lecture Notes in Economics and Mathematical Systems, in: Coping with Uncertainty, pages 283-300, Springer.
    28. Markose, Sheri & Giansante, Simone & Shaghaghi, Ali Rais, 2012. "‘Too interconnected to fail’ financial network of US CDS market: Topological fragility and systemic risk," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 627-646.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Emilio L. Cano & Javier M. Moguerza & Tatiana Ermolieva & Yurii Yermoliev, 2017. "A strategic decision support system framework for energy-efficient technology investments," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 25(2), pages 249-270, July.
    2. Mark Paddrik & H. Peyton Young, 2016. "Contagion in the CDS Market," Working Papers 16-12, Office of Financial Research, US Department of the Treasury.
    3. Ozili, Peterson K, 2017. "Earnings Management in Interconnected Networks: A Perspective," MPRA Paper 92647, University Library of Munich, Germany.
    4. Paddrick, Mark & Rajan, Sriram & Young, H. Peyton, 2020. "Contagion in derivatives markets," LSE Research Online Documents on Economics 100868, London School of Economics and Political Science, LSE Library.
    5. Mark Paddrik & Sriram Rajan & H. Peyton Young, 2020. "Contagion in Derivatives Markets," Management Science, INFORMS, vol. 66(8), pages 3603-3616, August.
    6. Paulo Ferreira & Éder J.A.L. Pereira & Hernane B.B. Pereira, 2020. "From Big Data to Econophysics and Its Use to Explain Complex Phenomena," JRFM, MDPI, vol. 13(7), pages 1-10, July.
    7. Li, Fei & Kang, Hao & Xu, Jingfeng, 2022. "Financial stability and network complexity: A random matrix approach," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 177-185.
    8. Fabio Caccioli & Paolo Barucca & Teruyoshi Kobayashi, 2018. "Network models of financial systemic risk: a review," Journal of Computational Social Science, Springer, vol. 1(1), pages 81-114, January.
    9. Irena Vodenska & Alexander P. Becker & Di Zhou & Dror Y. Kenett & H. Eugene Stanley & Shlomo Havlin, 2016. "Community Analysis of Global Financial Markets," Risks, MDPI, vol. 4(2), pages 1-15, May.
    10. Leonardo Massai & Giacomo Como & Fabio Fagnani, 2019. "Equilibria and Systemic Risk in Saturated Networks," Papers 1912.04815, arXiv.org, revised Jan 2021.
    11. Ramadiah, Amanah & Fricke, Daniel & Caccioli, Fabio, 2022. "Backtesting macroprudential stress tests," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    12. Rüdiger Frey & Juraj Hledik, 2018. "Diversification and Systemic Risk: A Financial Network Perspective," Risks, MDPI, vol. 6(2), pages 1-11, May.
    13. Giulio Cimini & Matteo Serri, 2016. "Entangling Credit and Funding Shocks in Interbank Markets," PLOS ONE, Public Library of Science, vol. 11(8), pages 1-15, August.
    14. Yajing Huang & Taoxiong Liu, 2023. "Diversification and Systemic Risk of Networks Holding Common Assets," Computational Economics, Springer;Society for Computational Economics, vol. 61(1), pages 341-388, January.
    15. Anouk Levels & René de Sousa van Stralen & Sînziana Kroon Petrescu & Iman van Lelyveld, 2018. "CDS market structure and risk flows: the Dutch case," DNB Working Papers 592, Netherlands Central Bank, Research Department.
    16. Kosmidou, Kyriaki & Kousenidis, Dimitrios & Ladas, Anestis & Negkakis, Christos, 2017. "Determinants of risk in the banking sector during the European Financial Crisis," Journal of Financial Stability, Elsevier, vol. 33(C), pages 285-296.
    17. V. Sasidevan & Nils Bertschinger, 2019. "Systemic Risk: Fire-Walling Financial Systems Using Network-Based Approaches," Papers 1912.05273, arXiv.org.
    18. Runjie Xu & Chuanmin Mi & Rafal Mierzwiak & Runyu Meng, 2019. "Complex Network Construction of Internet Financial risk," Papers 1904.06640, arXiv.org, revised Aug 2019.
    19. Cuba, Walter & Rodriguez-Martinez, Anahi & Chavez, Diego A. & Caccioli, Fabio & Martinez-Jaramillo, Serafin, 2021. "A network characterization of the interbank exposures in Peru," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 2(3).
    20. Marco Bardoscia & Paolo Barucca & Stefano Battiston & Fabio Caccioli & Giulio Cimini & Diego Garlaschelli & Fabio Saracco & Tiziano Squartini & Guido Caldarelli, 2021. "The Physics of Financial Networks," Papers 2103.05623, arXiv.org.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:13:y:2021:i:2:p:857-:d:481545. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.