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Complexity Analysis and Risk Management in Finance

In: Risk Management Post Financial Crisis: A Period of Monetary Easing

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  • Charilaos Mertzanis

Abstract

Standard financial risk management practices proved unable to provide an adequate understanding and a timely warning of the financial crisis. In particular, the theoretical foundations of risk management and the statistical calibration of risk models are called into question. Policy makers and practitioners respond by looking for new analytical approaches and tools to identify and address new sources of financial risk. Financial markets satisfy reasonable criteria of being considered complex adaptive systems, characterized by complex financial instruments and complex interactions among market actors. Policy makers and practitioners need to take both a micro and macro view of financial risk, identify proper transparency requirements on complex instruments, develop dynamic models of information generation that best approximate observed financial outcomes, and identify and address the causes and consequences of systemic risk. Complexity analysis can make a useful contribution. However, the methodological suitability of complexity theory for financial systems and by extension for risk management is still debatable. Alternative models drawn from the natural sciences and evolutionary theory are proposed.

Suggested Citation

  • Charilaos Mertzanis, 2014. "Complexity Analysis and Risk Management in Finance," Contemporary Studies in Economic and Financial Analysis, in: Risk Management Post Financial Crisis: A Period of Monetary Easing, volume 96, pages 15-40, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:csefzz:s1569-375920140000096001
    DOI: 10.1108/S1569-375920140000096001
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    Cited by:

    1. Oksana Omelchenko & Oleksandr Dorokhov & Oleg Kolodiziev & Liudmyla Dorokhova, 2018. "Fuzzy Modeling of the Creditworthiness Assessments of Bank’s Potential Borrowers in Ukraine," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 4, pages 100-125.
    2. Sylwia Bąk, 2023. "The Embedment of Risk Management in Enterprise Management System," International Journal of Contemporary Management, Sciendo, vol. 59(2), pages 1-16, June.

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