Contagion Exposure and Protection Technology

People adopt diverse measures to protect from contagion. I propose a taxonomy of protection technologies, and present a model to study the implications of the technology on the prevalence of infections and on welfare at different levels of exposure. I find that the effect of aggregate exposure on prevalence and on protection ineficiencies depends crucially on the characteristics of the available protection technology.For example, under certain conditions the existence of a vaccine will lead to lower infection rates and smaller welfare costs of decentralization as the society becomes denser. I discuss the implications for disease eradication, the equilibrium consequences of antigenic drift, the desirability of interventions in the absence of universal vaccines, and coordination failures in protection

International contagion - implications for policy

The authors try to identify and evaluate the public policy implications of financial crises. In this model, financial contagion can be driven by a combination of fundamentals and by self-fulfilling market expectations. The model allows the authors to identify different notions of contagion, especially the distinction between"monsoonal effects","spillovers", and"switchers between equilibria". They discuss both domestic and international policy options. Domestic policies, they say, should be aimed at reducing financial fragility - that is, reducing unnecessary short-term debt commitments. With explicit commitments, the maturity of external debts should be lengthened. With implicit commitments, such as private liability guarantees, they emphasize limiting or eliminating such guarantees, to improve an economy's international liquidity and reduce its exposure to contagion. Internationally, they stress the need for improving financial standards, which makes it easier to assess when a country is subject to different kinds of contagion. The effectiveness of international rescue packages depends on the kind of contagion to which a country is exposed. Implications: the international community should help those countries that are already helping themselves.Financial Crisis Management&Restructuring,Financial Intermediation,Banks&Banking Reform,Economic Theory&Research,Environmental Economics&Policies

Strategic Investment in Protection in Networked Systems

We study the incentives that agents have to invest in costly protection against cascading failures in networked systems. Applications include vaccination, computer security and airport security. Agents are connected through a network and can fail either intrinsically or as a result of the failure of a subset of their neighbors. We characterize the equilibrium based on an agent's failure probability and derive conditions under which equilibrium strategies are monotone in degree (i.e. in how connected an agent is on the network). We show that different kinds of applications (e.g. vaccination, malware, airport/EU security) lead to very different equilibrium patterns of investments in protection, with important welfare and risk implications. Our equilibrium concept is flexible enough to allow for comparative statics in terms of network properties and we show that it is also robust to the introduction of global externalities (e.g. price feedback, congestion).Comment: 32 pages, 3 figure

Risk media and the end of anonymity

Whereas threats from twentieth century 'broadcast era' media were characterised in terms of ideology and ‘effects', today the greatest risks posed by media are informational. This paper argues that digital participation as the condition for the maintenance of today's self identity and basic sociality has shaped a new principal media risk of the loss of anonymity. I identify three interrelated key features of this new risk. Firstly, basic communicational acts are archival. Secondly, there is a diminishment of the predictable 'decay time' of media. And, thirdly, both of these shape a new individual and organizational vulnerability of 'emergence' – the haunting by our digital trails. This article places these media risks in the context of the shifting nature and function of memory and the potential uses and abuses of digital pasts

El rediseño de la arquitectura financiera internacional desde la perspectiva latinoamericana: ¿quién paga la cuenta?

(Disponible en idioma inglés únicamente) En este trabajo se toma en cuenta las reformas actuales o propuestas del sistema financiero internacional, a la luz de la experiencia latinoamericana reciente. La mayoría de las propuestas se basan en uno de tres diagnósticos: flujos excesivos de capitales, flujos insuficientes de capitales y flujos de capitales excesivamente inestables. Aunque las teorías de flujos excesivos de capitales carecen de base empírica, esos puntos de vista subyacen tanto a las reformas actuales como las sugeridas. En una sección posterior se evalúan propuestas que tienen que ver con el apoyo financiero oficial, la participación del sector privado y normas y reglamentos financieros. El trabajo verifica las medidas destinadas a reducir el contagio y las crisis de liquidez, tales como un tribunal internacional de quiebras, y atribuye las dificultades financieras en América Latina en parte al pecado original, es decir, la incapacidad de los países de endeudarse a plazos largos en sus propias monedas.

Too Interconnected To Fail: Financial Contagion and Systemic Risk in Network Model of CDS and Other Credit Enhancement Obligations of US Banks

Credit default swaps (CDS) which constitute up to 98% of credit derivatives have had a unique, endemic and pernicious role to play in the current financial crisis. However, there are few in depth empirical studies of the financial network interconnections among banks and between banks and nonbanks involved as CDS protection buyers and protection sellers. The ongoing problems related to technical insolvency of US commercial banks is not just confined to the so called legacy/toxic RMBS assets on balance sheets but also because of their credit risk exposures from SPVs (Special Purpose Vehicles) and the CDS markets. The dominance of a few big players in the chains of insurance and reinsurance for CDS credit risk mitigation for banks� assets has led to the idea of �too interconnected to fail� resulting, as in the case of AIG, of having to maintain the fiction of non-failure in order to avert a credit event that can bring down the CDS pyramid and the financial system. This paper also includes a brief discussion of the complex system Agent-based Computational Economics (ACE) approach to financial network modeling for systemic risk assessment. Quantitative analysis is confined to the empirical reconstruction of the US CDS network based on the FDIC Q4 2008 data in order to conduct a series of stress tests that investigate the consequences of the fact that top 5 US banks account for 92% of the US bank activity in the $34 tn global gross notional value of CDS for Q4 2008 (see, BIS and DTCC). The May-Wigner stability condition for networks is considered for the hub like dominance of a few financial entities in the US CDS structures to understand the lack of robustness. We provide a Systemic Risk Ratio and an implementation of concentration risk in CDS settlement for major US banks in terms of the loss of aggregate core capital. We also compare our stress test results with those provided by SCAP (Supervisory Capital Assessment Program). Finally, in the context of the Basel II credit risk transfer and synthetic securitization framework, there is little evidence that the CDS market predicated on a system of offsets to minimize final settlement can provide the credit risk mitigation sought by banks for reference assets in the case of a significant credit event. The large negative externalities that arise from a lack of robustness of the CDS financial network from the demise of a big CDS seller undermines the justification in Basel II that banks be permitted to reduce capital on assets that have CDS guarantees. We recommend that the Basel II provision for capital reduction on bank assets that have CDS cover should be discontinued.