Economic and Financial Risk
Natural catastrophes and destructive events can have massive impacts on the regional economies of afflicted areas, and extreme losses can cause ripples through the international economy. Understanding the processes of economic recovery is important in managing reconstruction efforts.
And while catastrophes cause external impacts on economies, the processes by which exogenous shocks destabilise financial markets and trigger economic crises is not well understood.
Financial risk managers and macro-economic planners need to know the likelihood and severity of potential future downturns, particularly the 'tail' events of economic catastrophe. The credit crunch of 2008 has caused the biggest economic crisis for at least 80 years, but most economists and macro-economic models failed to see it coming. Traditional economic theory is being re-examined to find better ways of modelling, anticipating, and managing economic crises.
New approaches, such as behavioural economics and complexity economics, suggest that business cycles, stock market volatility and catastrophic collapse are inherent properties of the economy as a complex system. Bubbles, recessions and collapse are inevitable phases of the evolutionary pressures of the economic system, with external events causing triggers that lead to behavioural responses, feedback and tipping points that might potentially be characterised, quantified and modelled from the characteristics of the system.
This programme researches the economic frameworks for optimising recovery after a disaster, and for preparing for, and managing the risk of future macroeconomic catastrophes in financial and corporate risk management.
Key Research Areas
- Regional recovery policies after a natural disaster: developing strategies to ensure that reconstruction investment maximises the long term economic regeneration of the region.
- Development of a framework to explore economic and financial shock scenarios. This framework represents economic and social interactions as complex systems, driven by behavioural actions, group activity, and psychological pressures.
- Compilation of a comprehensive catalogue of potential exogenous triggers for future economic catastrophes, and approaches to understanding, monitoring and preparing for such threats.
The programme is in collaboration with existing expertise in the University of Cambridge, including: