Simple models won’t cut it for systemic risk
Understanding interconnectedness and capturing it within models is a key challenge, say quants
Monitoring the build-up of systemic risk across the financial system is a key concern for policymakers seeking stability. Unfortunately, it is also a difficult task. Models for this most dangerous of risks – whether market- or network-based – started simple, but simple models won’t cut it going forward.
The most obvious problem is the extraneous, multi-faceted nature of systemic risk. Models need to embrace several channels of risk at the same time, with the aim of determining better policy
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