seminar: When panic makes you blind: a chaotic route to systemic risk
speaker: Piero Mazzarisi (Università di Bologna)abstract: We introduce a slow-fast dynamical system to study the role of the expectation feedbacks on systemic stability of financial markets. We study a simple stylization of a financial market, that is a set of financial institutions having capital requirements in the form of the Value at Risk constraint, following standard mark-to-market and risk management rules and investing in some risky assets. In financial markets, the financial institutions try to anticipate future market movements by forming expectations, specifically they estimate the risk of their portfolios by looking at the past observations of the investment prices. Accordingly, they make decisions on how much to invest, the value of the financial leverage and the diversification of the portfolio. In the presence of investment illiquidity, portfolio decisions endogenously influence the evolution of investment prices because of the price impact of the trading. In turn, the price dynamics determines the perception of risk and as a consequence it influences the portfolio decisions. When banks correctly estimate future risks, the financial system is in a fixed-point equilibrium. We show how the fixed point equilibrium of the financial system may break into leverage cycles when the memory of the risk expectations decreases below a given threshold. When memory decreases further, a bifurcation cascade leading to chaos follows. We study the dynamical properties of the financial system in relation with the financial policy and the impact of financial innovations. We discuss also the role of trading costs, e.g. the Tobin tax, regarding systemic stability of the financial system.
timetable:
Tue 25 Oct, 11:00 - 12:00, Sala Conferenze Centro De Giorgi
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