poster: POSTER SESSION: When panic makes you blind: a chaotic route to systemic risk
speaker: Fabrizio Lillo (Università di Bologna)speaker: Stefano Marmi (Scuola Normale Superiore)
speaker: Piero Mazzarisi (Università di Bologna)
abstract: Systemic risk refers to an instability involving the whole or a large component of the financial system, typically caused by a stochastic shock and exacerbated by interelations between financial intermediaries. Systemic risk and systemic financial stability represent a problem of renewed interest after the financial crisis of 20072009. In recent years, several works have focused on different aspects of the same problem. Our contribution is to propose a dynamical systems approach to a challenging issue concerning the fact that financial markets are expectations feedback systems. Expectations about the future state of the financial system are part of the law of motion of the financial system itself, that is the expectations of future prices and risks influence today the agents’ decisions and their portfolio choices. When a rational investor can correctly anticipate future volatility and correctly estimate portfolio adjustments according to its strategy, a financial market populated by such investors will be in a fixed point equilibrium. However, several recent publications have stressed how financial agents populating a financial market tend to be boundedly rational. Bounded rationality in portfolio choices may have crucial consequences on the aggregate behavior of all market participants and lead to the breaking of the fixed point equilibrium of the financial system. We investigate the role of the bounded rationality in financial markets in terms of systemic risk and systemic financial stability.
timetable:
Thu 28 Jan, 14:00 - 15:00,
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