Liquidity and Systemic Risk

Systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the entire system.

It can be defined as “financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or conditions in financial intermediaries”.It refers to the risks imposed by interlinkages and interdependencies in a system or market, where the failure of a single entity or cluster of entities can cause a cascading failure, which could potentially bankrupt or bring down the entire system or market.

Liquidity risk is a financial risk that for a certain period of time a given financial asset, security or commodity cannot be traded quickly enough in the market without impacting the market price.

Liquidity risk is financial risk due to uncertain liquidity. An institution might lose liquidity if its credit rating falls, it experiences sudden unexpected cash outflows, or some other event causes counterparties to avoid trading with or lending to the institution. A firm is also exposed to liquidity risk if markets on which it depends are subject to loss of liquidity.

David K.A. Mordecai Participated in an IAFE Liquidity Risk Committee Event on Financial Innovation, Complexity, Fire Sales and Panics

David K.A. Mordecai Participated in an IAFE Liquidity Risk Committee Event on Financial Innovation, Complexity, Fire Sales and Panics

David K.A. Mordecai, President of Risk Economics®, participated in the International Association of Financial Engineers (IAFE) Liquidity Risk Committee (LRC) Panel Discussion on Financial Innovation, Complexity, Fire Sales and Panics, on December 15, 2010, at Pricewaterhouse Coopers office in New York City. David K.A. Mordecai chaired the panel, and the other two participants were Alp Simsek and Roy Henriksson.

After a brief introduction to the general topic by David KA. Mordecai, Alp Simsek provided an overview of the work between him and his co-author Ricardo Caballero of MIT from two of their joint papers: Fire Sales in a Model of Complexity and Complexity and Financial Panics. He followed with a synopsis describing his own work-in-progress on speculation and new asset innovations.

Roy Henriksson then focused on the policy implications related to the effects of complexity on liquidity and forced asset sales, followed by some further discussion with David KA. Mordecai describing the practical relevance of Alp Simsek’s research for understanding market and instrument complexity within the context of fire sales and financial panics, and also moderated the general Q&A.

David K.A. Mordecai Participated in an IAFE Liquidity Risk Committee Event on Financial Innovation, Complexity, Fire Sales and Panics

The LRC attempts to bridge the gap between different concepts of liquidity by organizing and sponsoring forums for discourse among academics, practitioners, and policy makers, and to promote the cultivation and dissemination of applied research relating to all aspects of liquidity risk that affect the stability and function of financial markets and institutions. The LRC is comprised of academics, practitioners, and policymakers involved in researching liquidity risk and its effects on market stability within the context of diverse institutional and industry settings, and in relationship to public policy.

David Mordecai is President and Co-Founder of Risk Economics, a New York City based advisory firm. Risk Economics specializes in the application of computational economics to the proprietary development and scalable implementation of robust modeling and data analytic frameworks for valuation, strategic and systemic risk analysis, and dynamic asset-liability management.

David K.A. Mordecai Participated in an IAFE Liquidity Risk Committee Event on Financial Innovation, Complexity, Fire Sales and Panics Read More »

David K.A. Mordecai Participated in an IAFE Liquidity Risk Committee Event on Multi-Agent Models and Network Externalities

David K.A. Mordecai Participated in an IAFE Liquidity Risk Committee Event on Multi-Agent Models and Network Externalities

David K.A. Mordecai, President of Risk Economics, participated in the International Organization of Financial Engineers (IAFE) Liquidity Risk Committee (LRC) Event: Multi-Agent Models and Network Externalities: The Interconnectedness Underlying Systemic Risks and Episodic Liquidity. The event was held on June 10, 2010 at Pricewaterhouse Coopers office in New York City.

David K.A. Mordecai was the session chair for this panel discussion of multi-agent approaches to modeling financial networks addressing a range of applications to crashes and panics, episodic liquidity and contagion effects, and the various interdependencies resulting from capital flows across firms and markets. The other panelists were Alan King, IBM Thomas J Watson Research Center, and Duncan Watts, Yahoo Inc. and Adjunct Senior Research Fellow, Columbia University.

David K.A. Mordecai Participated in an IAFE Liquidity Risk Committee Event on Multi-Agent Models and Network Externalities

The LRC attempts to bridge the gap between different concepts of liquidity by organizing and sponsoring forums for discourse among academics, practitioners, and policy makers, and to promote the cultivation and dissemination of applied research relating to all aspects of liquidity risk that affect the stability and function of financial markets and institutions. The LRC is comprised of academics, practitioners, and policymakers involved in researching liquidity risk and its effects on market stability within the context of diverse institutional and industry settings, and in relationship to public policy.

David Mordecai is President and Co-founder of Risk Economics, a New York City based advisory firm. Risk Economics specializes in the application of computational economics to the proprietary development and scalable implementation of robust modeling and data analytic frameworks for valuation, strategic and systemic risk analysis, and dynamic asset-liability management.

David K.A. Mordecai Participated in an IAFE Liquidity Risk Committee Event on Multi-Agent Models and Network Externalities Read More »

David K.A. Mordecai presented at the Santa Fe Institute Systemic Risk Initiative

David K.A. Mordecai presented at the Santa Fe Institute Systemic Risk Initiative

David K.A. Mordecai presented at the Santa Fe Institute (SFI) Systemic Risk Initiative. The event explored the role of systemic risk in financial markets. The gathering drew a dozen experts from the financial sector and another dozen scientists, and meeting participants sought to explore the extent to which tools and principles of complexity science might allow for a richer understanding of systemic risk in financial markets and the economy.

Organizers of the Systemic Risk Initiative included the following individuals:

  • David Mordecai, President, Risk Economics and Senior Advisor, Compass Lexecon 
  • Kenneth Arrow, Nobel Laureate, Stanford University, Economics
  • Doyne Farmer, SFI Professor 
  • John Geanakoplos, SFI External Professor and Science Steering Committee Chair; Yale University, Economics
  • Simon Levin, SFI Science Board Co-Chair; Princeton, Ecology
  • Michael Mauboussin, Chief Investment Strategist, Legg Mason Capital Management
  • Bill Miller, Chief Investment Officer, Legg Mason and SFI Board of Trustees Chair 
  • John Rundle, SFI External Professor; UC Davis, Physics
  • Fabrizio Lillo, University of Palermo

Santa Fe Institute

The event was part of the Santa Fe Institute’s Business Network meetings, where Network members and SFI scientists explore fundamental principles that help make sense of the complexities faced by all types of organization. The event was held on October 15, 2009 and hosted by Credit Suisse in New York City.

The Santa Fe Institute is is at the forefront of the scientific understanding of complex systems at all scales, from the microscopic to the cosmic. By jointly exploring a variety of complex systems from different perspectives, Network members gain new understanding that may enable them to engage their own organization and address challenges in a wholly unique and revolutionary manner.

David K.A. Mordecai presented at the Santa Fe Institute Systemic Risk Initiative Read More »

David K.A. Mordecai Participated in the IAFE Liquidity Risk Committee Panel on Liquidity Risk, Systemic Risk, and Market Risk

David K.A. Mordecai Participated in the IAFE Liquidity Risk Committee Panel on Liquidity Risk, Systemic Risk, and Market Risk

David K.A. Mordecai, President of Risk Economics, participated in the International Organization of Financial Engineers (IAFE) Liquidity Risk Committee panel entitled Liquidity Risk, Systemic Risk, and Market Risk. David K.A. Mordecai was the moderator of the event, with discussant Tobias Adrian, Federal Reserve Bank of New York, and panelists Roy Henrikkson, Advanced Portfolio Management and Steve Allen, New York University. The event was held on April 25, 2007, and hosted at Goldman Sachs in New York City.

This event sought to discuss the following questions:

  • What is systemic risk?
  • What is the relationship between liquidity risk and systemic risk?
  • What is the relationship between market risk and liquidity risk?
  • When and how does volatility increase (decrease) liquidity risk?
  • How does liquidity affect volatility?

David K.A. Mordecai Participated in the IAFE Liquidity Risk Committee Panel on Liquidity Risk, Systemic Risk, and Market Risk

The Liquidity Risk Committee (LRC) attempts to bridge the gap between different concepts of liquidity by organizing and sponsoring forums for discourse among academics, practitioners, and policy makers, and to promote the cultivation and dissemination of applied research relating to all aspects of liquidity risk that affect the stability and function of financial markets and institutions. The LRC is comprised of academics, practitioners, and policymakers involved in researching liquidity risk and its effects on market stability within the context of diverse institutional and industry settings, and in relationship to public policy.

David Mordecai is President and Co-Founder of Risk Economics, a New York City based advisory firm. Risk Economics specializes in the application of computational economics to the proprietary development and scalable implementation of robust modeling and data analytic frameworks for valuation, strategic and systemic risk analysis, and dynamic asset-liability management.

David K.A. Mordecai Participated in the IAFE Liquidity Risk Committee Panel on Liquidity Risk, Systemic Risk, and Market Risk Read More »

David K.A. Mordecai Participated in the IAFE Liquidity Risk Committee Discussion on the State of the Market

David K.A. Mordecai Participated in the IAFE Liquidity Risk Committee Discussion on the State of the Market

David K.A. Mordecai, President of Risk Economics, served as moderator for the International Association of Financial Engineers (IAFE) Liquidity Risk Committee panel discussion on Liquidity Risk and the State of the Market: A Discussion of the Role of Market Externalities, Path-Dependence, and State-Dependence on Asset and Funding Liquidity.

The other panelists were the following:

  • Sanford Grossman, Chairman, Quantitative Financial Strategies, Inc.
  • Steve Ross, Franco Modigliani Professor of Finance and Economics, MIT and  Senior Fellow, IAFE
  • Myron Scholes, Chairman, Oak Hill Platinum Partners and Senior Fellow, IAFE

The event was co-sponsored by Bloomberg, the International Securities Exchange and Pacific Alternative Asset Management Company. It took place on  February 23, 2006 at Bloomberg headquarters in New York City.

Liquidity risk has become recognized to be among the most complex and pernicious risks facing financial markets and institutions in terms of their function and stability. Liquidity risk is now being studied by academics, practitioners and policymakers as the primary cause of anecdotal phenomenon deemed asset bubbles, financial contagion and market crashes. Furthermore, liquidity risk also undermines price efficiency, and influences complex market behaviors such as strategic and predatory trading. This inaugural forum of leading minds within financial economics discussed the fundamental questions and issues underlying liquidity risk.

David K.A. Mordecai Participated in the IAFE Liquidity Risk Committee Discussion on the State of the Market

The Liquidity Risk Committee (LRC) of the International Association of Financial Engineers attempts to bridge the gap between different concepts of liquidity by organizing and sponsoring forums for discourse among academics, practitioners, and policy makers, and to promote the cultivation and dissemination of applied research relating to all aspects of liquidity risk that affect the stability and function of financial markets and institutions. The LRC is comprised of academics, practitioners, and policymakers involved in researching liquidity risk and its effects on market stability within the context of diverse institutional and industry settings, and in relationship to public policy.

David Mordecai is President and Co-Founder of Risk Economics, a New York City based advisory firm. Risk Economics specializes in the application of computational economics to the proprietary development and scalable implementation of robust modeling and data analytic frameworks for valuation, strategic and systemic risk analysis, and dynamic asset-liability management.

David K.A. Mordecai Participated in the IAFE Liquidity Risk Committee Discussion on the State of the Market Read More »

David K.A. Mordecai Participated in the IAFE 2005 Liquidity Risk Symposium

David K.A. Mordecai Participated in the IAFE 2005 Liquidity Risk Symposium

David K.A. Mordecai, President of Risk Economics participated in the International Organization of Financial Engineers (IAFE) Liquidity Risk Committee 2005 Liquidity Risk Symposium, as the discussant of a presentation on Market Liquidity & Funding Liquidity by Lasse Pedersen of New York University. The full day event was sponsored by JP Morgan, and held on December 1, 2005 at Reuters in New York City.

This event drew leading researchers, senior industry practitioners and regulators. Topics presented included liquidity crises, access to funding and market liquidity, strategic and predatory trading and its market impact, as well as the role of government agencies in providing a safety net.

The Liquidity Risk Committee (LRC) attempts to bridge the gap between different concepts of liquidity by organizing and sponsoring forums for discourse among academics, practitioners, and policy makers, and to promote the cultivation and dissemination of applied research relating to all aspects of liquidity risk that affect the stability and function of financial markets and institutions. The LRC is comprised of academics, practitioners, and policymakers involved in researching liquidity risk and its effects on market stability within the context of diverse institutional and industry settings, and in relationship to public policy.

David K.A. Mordecai Participated in the IAFE 2005 Liquidity Risk Symposium

David Mordecai is President and Co-Founder of Risk Economics, a New York City based advisory firm. Risk Economics specializes in the application of computational economics to the proprietary development and scalable implementation of robust modeling and data analytic frameworks for valuation, strategic and systemic risk analysis, and dynamic asset-liability management.

David K.A. Mordecai Participated in the IAFE 2005 Liquidity Risk Symposium Read More »