An Evolutionary Theory of Systemic Risk and its Mitigation Outlined for the Global Financial System

Global Finance Conference, Chicago, Illinois, May 22, 2012

Posted: 12 Jan 2010 Last revised: 18 Apr 2017

See all articles by Thomas Ilin

Thomas Ilin

Cranfield University - School of Management

Date Written: July 20, 2011

Abstract

A theory of systemic risk is outlined for the global financial system, with practical implications for systemic risk mitigation, based on evolutionary economics viewed from an operational behaviour perspective. The paper begins with an introduction to systemic crises and what motivates this contribution, followed by an explanation of the theory development approach taken. Then a critical review of the main themes in relevant literature leads to a proposed gap in theory. The scope of extant theories is argued to be limited to perceived causes and effects of specific events from the past, with few general insights for recognizing, avoiding and responding to potential failures of this system, wherever they may emerge in the future. After declaring theoretical foundations, new conjectures and propositions from a current programme of research are presented to address that gap and outline a general theory, introducing multidisciplinary notions about: an operational behaviour paradigm of systemic failure for the global financial system; a cusp catastrophe-type model of supply versus demand in systemically important financial services (SIFS) among systemically important participants (SIPs); and four hypotheses for plausibility evaluation. Then a brief discourse explores new opportunities for systemic risk mitigation based on these contributions, qualified by a critical assessment of the value and limitations of the outlined theory, and consideration of its falsifiability. In conclusion, further research is suggested using agent-based methods from computational economics (ACE) to expound, empirically validate and verify this theory, with data about a recent national financial system failure serving as a proxy for similar events in the global financial system.

*Winner of 'best paper award' at the Global Finance Conference, Chicago, Illinois, May 22, 2012

Keywords: Systemic risk, systemic failure, risk mitigation, evolutionary economics, economic theory, computational economics, global financial system, operational behaviour, operational paradigm, cusp catastrophe

JEL Classification: A12, E11, E10, E44, E58, F02, G15

Suggested Citation

Ilin, Thomas, An Evolutionary Theory of Systemic Risk and its Mitigation Outlined for the Global Financial System (July 20, 2011). Global Finance Conference, Chicago, Illinois, May 22, 2012, Available at SSRN: https://ssrn.com/abstract=1533715 or http://dx.doi.org/10.2139/ssrn.1533715

Thomas Ilin (Contact Author)

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

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