Risk Management and Systemic Risk

The LFE is actively involved in research that aims to identify methods for measuring and managing risk, both standard and systemic types of risk. Although risk management continues to be an area of active research in the academic finance profession, the Financial Crisis of 2007–2009 and the sovereign debt crisis that followed have created renewed interest in systemic risk, a concept originally intended to describe bank runs and currency crises, but which now applies to any broad-based breakdown in the financial system. Systemic risk can be realized as a series of correlated defaults among financial institutions, occurring over a short time span and triggering a withdrawal of liquidity and widespread loss of confidence in the financial system as a whole. The events of 2007–2009 have demonstrated that panic and runs can affect non-bank entities as well, such as money market funds, insurance companies, hedge funds, government-sponsored enterprises, and broker/dealers. Therefore, the starting point for regulatory reform is to develop formal measures of systemic risk and measures that capture the linkages and vulnerabilities of the entire financial system—not just those of the banking industry—with which we can monitor and regulate the overall level of risk to the system and its ties to the real economy.

Current Research

  • Macroeconomic Models for Monetary Policy: A Critical Review from a Finance Perspective
    Winston Wei Dou and Andrew W. Lo
  • Risk Prioritization: A Bayesian Decision Analysis Approach
    Arnold Barnett and Andrew W. Lo
  • Mapping Changes within the US Financial Regulatory System Post Dodd-Frank
    Mathew Kabatoff and Andrew W. Lo
  • Sovereign, Bank, and Insurance Credit Spreads: Connectedness and System Networks
    Monica Billio, Mila Getmansky, Dale Gray, Andrew W. Lo, Robert C. Merton, and Loriana Pelizzon