Quantification of Economical Crisis Risk.

The goal of this thinking effort is to initiate an ambitious and innovative research program over quantification of Economical Crisis Risk. This is clearly a useful, noble and scientifically challenging topic.

From a functional point of view, this research program intends to qualify a new risk, corresponding to the formation of economical bubbles within markets. Such a tool could be found useful by risk managers, rating agencies, private or institutional regulators. The long term goal is to build a decision help tool, in order to anticipate efficiently the pure economical effects of crisis. Obviously, such a tool is not expected to avoid economical crisis, most probably inherent to the economical tissue. However it could be used to smoothen out effects of future crisis.

From a pure technical point of view, the goal would be to develop quantitative analysis tools in order to measure the risk of formation of an economical bubble over a single asset (equity / rate / commodity), then to aggregate this risk over industrial sector / market. Speaking of pure quantitative analysis, the purposes are to measure the probability of occurrence of an economical bubble formation at any future date, and to precise (in a stochastic sense) the dynamic of prices during formation.

There exists distinct phenomena's that generates economical crisis, ranging from psychological to pure economical effects. Among them, speculative behavior of traders based over profit earnings is a reality. Profit earning at heart of our economy. Its main virtue is to stabilize Markets. However, its main drawback is to generate economical bubbles.

From a scientific point of view, profit is a deterministic effect. An economical system based over profit can be simulated, see this numerical simulation, and is (stochastically) predictable. There does not exist any reason for such phenomena's not to be forecasted. In other words, this research program intends to measure the risk of formation of an economical crisis beard by pure speculative behavior. We think that it is one of the main component of bubble formation, mathematicians should be able to handle it, and it is of crucial importance to measure it.

This is obviously a mid / long term research program, that necessitate to build a new and innovative approach. Governments must now initiate it: trying to understand the economical tissue in which people are embedded should be placed under governments responsibility. However, this kind of program has no hope to be successful without a network of competencies and links coming from corporate / institutional. CRIMERE ambition is to insulate these ideas, from a scientific and political point of view. CRIMERE contacted several institutions / corporate organisms, proposing to coordinate this program at a global level if necessary.

To support this initiative, all work concerning this program are accessible and open to everybody: some posts discuss this topic on CRIMERE semi-professional blog (www.crimere.com/blog), this pages announces this research program, numerical simulations and papers are in open access (http://code.google.com/p/optimally-transported-schemes/).

ast modified: 03/14/09