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Know your crisis

Throughout history, financial crises have always occurred and will always occur in the future. The main reasons are that financial markets are not completely efficient and investors not fully rational. Examples of major crises are the ‘Tulip mania’ in Amsterdam in the early 17th century and, more recently, the financial crisis after 2007. During such crises, market movements can be enormous. For example, during the Wall Street crash in 1929, stock prices fell by 85% in total. Although each crisis occurs in its specific context, a generic pattern can be identified. According to the Kindleberger-Minsky model, a ‘displacement’ of expectations triggers a boom, which turns into a euphoric phase before the ‘bubble’ finally bursts. Credit provision, and more specifically its instability, is at the core of this process. Using this framework, potential new crises can be identified, but a false sense of safety in risk management should be avoided.

Know your crisis

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