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Systemic Risk Seen from the Perspective of Physics

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One of the lessons learned from the recent financial crisis is the need to understand the systemic risk in the financial system – i.e., the risk (or probability) for the financial system ‘as a whole’ to turn unstable. As there are analogous concepts in the physics of complex systems, three key aspects of the development of complex systems will be evaluated here: (i) non-linearity, unpredictability, and deterministic chaos; (ii) non-linearity, non-equilibrium, and patterns in space and time; and (iii) phase transitions as a result of ‘magnetic’ ordering. Although financial systems depend to a certain degree on human behavior, the perspective of physics can help to build up a better understanding of how systems ‘as a whole’ develop as a result of interactions between the participants.

Suggested Citation

  • Milkau, Udo, 2011. "Systemic Risk Seen from the Perspective of Physics," Journal of Financial Transformation, Capco Institute, vol. 31, pages 73-81.
  • Handle: RePEc:ris:jofitr:1451
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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
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    6. Shojai, Shahin, 2009. "Economists' Hubris - The Case of Mergers and Acquisitions," Journal of Financial Transformation, Capco Institute, vol. 26, pages 4-12.
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    Keywords

    systemic risk; physics of complex systems; non-linearity; non-equilibrium; phase transitions;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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