Journal Article

Risk management with interdependent choice

S Morris and HS Shin

in Oxford Review of Economic Policy

Published on behalf of The Oxford Review of Economic Policy Ltd

Volume 15, issue 3, pages 52-62
Published in print September 1999 | ISSN: 0266-903X
Published online September 1999 | e-ISSN: 1460-2121 | DOI: http://dx.doi.org/10.1093/oxrep/15.3.52
Risk management with interdependent choice

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  • Economic Development and Growth
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Risks faced by traders from price movements are sometimes magnified by the actions of other traders. Risk-management systems which neglect this feature may give a seriously misleading picture of the true risks. The hazards arising from this potential blindspot are at their most dangerous when the prevailing conventional wisdom lulls traders into a false sense of security on the attractiveness of a trading position. The efforts of one trader to reverse his trade makes more acute the need to follow suit on the part of others. For markets dominated by traders with short time horizons, such interdependence leads to exaggerated price movements. Estimates of 'value at risk' which recognize such interdependence of actions can diverge substantially from those given by conventional techniques.

Journal Article.  0 words. 

Subjects: Economic Development and Growth ; Public Economics ; Political Economy ; Public Policy

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