Business as Usual and Rare Events

Abstract

The primary task of risk management risk minimization has propelled the use of derivatives to their current levels. Through the engineering of derivative contracts, agents can (ex)change risk. As a financial technology, risk management is more robust than current modeling techniques might suggest. This robustness owes much to the fact that, in business-as-usual conditions, risk decays at the aggregate level and over long time horizons. Market imperfections might, however, cause large losses in highly leveraged situations. The author explains how the modeling of markets as multiagent interacting systems is a new approach that holds the promise of allowing an integrated view of business as usual and extreme events.