Starts 17 Mar 2009 12:30
Ends 17 Mar 2009 20:00
Central European Time
ICTP
Leonardo da Vinci Building Seminar Room
Strada Costiera, 11 I - 34151 Trieste (Italy)
The expansion in the diversity of instruments in financial markets, according to Asset Pricing Theory (APT), provides more means for risk diversification, and brings the syetem closer to the limit of "complete markets", in which risk can be eliminated altogether. The proliferation of credit derivatives in the past decade, and the recent crisis, have raised serious doubts on this view, mostly because of market imperfections, i.e. deviations of real markets from the ideal conditions postulated in APT. In this talk, I will first review the main insights of APT. Then I will show that one can use the tools of statistical physics of disordered systems to characterize the typical properties of a large random market. This suggests that, even in the idealized market described by APT, the proliferation of financial instruments erodes systemic stability and it drives the market to a critical state characterized by large susceptibility.
  • M. Poropat