A primer on reflexivity and price dynamics under systemic risk
Tom Fischer
TL;DR
This paper explores how reflexive feedback processes influence price dynamics in financial networks under systemic risk, linking financial reflexivity with no-arbitrage pricing theory.
Contribution
It introduces a simple quantitative model of reflexivity in financial networks and outlines a theory connecting reflexivity with no-arbitrage pricing under systemic risk.
Findings
Demonstrates reflexive feedback effects after an exogenous shock
Connects financial reflexivity with pricing theory under systemic risk
Provides a framework for understanding price dynamics in interconnected financial systems
Abstract
A simple quantitative example of a reflexive feedback process and the resulting price dynamics after an exogenous price shock to a financial network is presented. Furthermore, an outline of a theory that connects financial reflexivity, which stems from cross-ownership and delayed or incomplete information, and no-arbitrage pricing theory under systemic risk is provided.
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Taxonomy
TopicsComplex Systems and Time Series Analysis · Economic theories and models · Monetary Policy and Economic Impact