Financial Crisis and Contagion: A Dynamical Systems Approach

26 Pages Posted: 2 Jan 2011 Last revised: 28 Nov 2011

See all articles by Youngna Choi

Youngna Choi

Montclair State University - Department of Mathematical Sciences

Raphael Douady

CES Univ. Paris 1; Riskdata; Stony Brook university

Date Written: October 30, 2011

Abstract

The 2007-2009 financial crisis provided need to investigate the causes of systemic risk - also known as contagion - and cures to avoid it. In this article, we use well-established theories in dynamical systems, bifurcation, symbolic dynamics, and chaos, to explain the mechanism behind the contagion in the financial crisis, and provide insight on why conventional economic stimulus including quantitative easing cannot improve sluggish economy and resolve liquidity shortage as well as expected. We further suggest how future economic stimulus should be executed, whether to prevent systemic risk or to get out of a recession. Our contribution is to provide a method to resolve inter-agent liquidity problems in general.

This is a revised and updated version of the article "Systemic Risk, Quantitative Easing, and Chaos: Dynamical Systems Approach" which used to be on this website. The current version will appear in "Handbook on Systemic Risk" from Cambridge University Press.

Keywords: Systemic Risk, Contagion, Butterfly Effect, Bifurcation, Symbolic Dynamics, Chaos

Suggested Citation

Choi, Youngna and Douady, Raphael, Financial Crisis and Contagion: A Dynamical Systems Approach (October 30, 2011). Available at SSRN: https://ssrn.com/abstract=1733706 or http://dx.doi.org/10.2139/ssrn.1733706

Youngna Choi (Contact Author)

Montclair State University - Department of Mathematical Sciences ( email )

Upper Montclair, NJ 07043
United States
973.655.7782 (Phone)
973.655.7686 (Fax)

Raphael Douady

CES Univ. Paris 1 ( email )

106 bv de l'Hôpital
Paris, 75013
France

Riskdata ( email )

6, rue de l'Amiral Coligny
Paris, 75001
France

HOME PAGE: http://www.riskdata.com

Stony Brook university ( email )

Stony Brook, NY NY 10017
United States
9174769417 (Phone)
10017-2146 (Fax)

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