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Financial innovation and the crisis

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After summarizing the evolution of banking and financial markets over the past four decades, this talk will analyze the role of derivatives in the recent financial crisis. Today the notional principal of these instruments outstanding is roughly ten times global GDP . Particular attention will be focussed on the similar growth patterns of the fixed income/FX and credit derivative markets a decade apart. I shall argue that each had three phases: innovation, exponential growth of appropriate risk transfers and final misbehaviour of issuers leading to the crisis. The role of quantitative methods in this story will be examined and the nature of many egregious products sold in the boom, and currently outstanding, discussed.

This talk is part of the Financial History Seminar series.

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