Managing volatility: volatility is an ever-present feature of business life and the variety of gets larger every day.
| Author | Wilson, Elliot |
| Position | Economics - Column |
This doesn't I make it any easier to predict the future but every new crisis I brings valuable insight into how to stay on track in a turbulent world
[ILLUSTRATION OMITTED]
[ILLUSTRATION OMITTED]
Faith in the theory of efficient markets was probably destroyed for- Fever by the events of 2008 when market volatility spiralled out of control, overwhelming major financial institutions and spreading contagion throughout the financial system. This has sparked a reassessment of the way companies, across all sectors, analyse and manage risks, a process that puts finance professionals centre stage.
However, the financial crisis has not been the only catalyst for change. Political risk monitoring also failed to anticipate the democratic uprisings that toppled dictators in Tunisia and Egypt this year, and the domino effect across the Middle East and north Africa.
The earthquake that hit Japan in March was another illustration of the uncontrollable forces that we face. Although the country was better prepared than almost any other to cope with such an intense shock, the force of the tsunami that followed still had devastating effects and the damage to the Fukushima nuclear power plant was unforeseen.
At times, this turbulence has no doubt left some companies, governments and communities feeling completely impotent to control the world around them. More importantly, though, it is encouraging organisations to spend a lot of intellectual energy trying to understand how to better predict and mitigate future crises. Strategic risk management is also becoming an integral part of everyday business and financial processes.
Financial risk
In 2006 Paul Woolley, former banker, economist and founder of fund manager GMO Woolley, set out to explain why economies blunder from one bubble and recession to another with such frequency - and why these cycles are getting shorter.
The answer, according to the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at the London School of Economics, is that we have come to believe that markets can be relied on to squeeze out inefficiencies and to correctly value assets such as commodities, stocks, bonds, human talent and intellectual property.
"Financial markets are often significantly mis-priced," says Woolley. "And yet all the risk models we use are based on the assumption that capital markets and markets in general are efficient. They aren't. Most of the time they are pointing in the wrong direction altogether."
There were a few voices that predicted the financial crisis, but they were largely dismissed...
To continue reading
Request your trialCOPYRIGHT GALE, Cengage Learning. All rights reserved.
