Wasn’t the 2008 credit crunch due to this (at least partly)? Numerous dependencies between different financial institutions which they only partly understood so they all stopped trusting each other?
I’ve heard that there has been a similar situation for many years in derivatives—a vast complex largely uncharted edifice of dependencies between complex financial instruments that are based on other financial instruments e.g. share prices. If parts of it collapse no-one knows which other bits will collapse too. Its size depends how you look at it, but it’s certainly in the trillions of $, and by some accounts it’s far larger than the entire real-world economy. https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp
If this is the case, would it be possible and/or useful to trace the “dependency tree”, determine what instrument lay most precarious atop the mound of interconnected dependencies, and determine a good bet on its likelihood of failure as compared to that of less dependent instruments? [1]
...Or did I just describe something that has already been done or dismissed/invalidated/etc? It gives me the same vague suspicion I got as a fresh undergrad having just independently theorized file compression for the umpteenth time (many students having learned some basics of information theory do this if they don’t already know how compression works.)
Wasn’t the 2008 credit crunch due to this (at least partly)? Numerous dependencies between different financial institutions which they only partly understood so they all stopped trusting each other?
I’ve heard that there has been a similar situation for many years in derivatives—a vast complex largely uncharted edifice of dependencies between complex financial instruments that are based on other financial instruments e.g. share prices. If parts of it collapse no-one knows which other bits will collapse too. Its size depends how you look at it, but it’s certainly in the trillions of $, and by some accounts it’s far larger than the entire real-world economy. https://www.investopedia.com/ask/answers/052715/how-big-derivatives-market.asp
If this is the case, would it be possible and/or useful to trace the “dependency tree”, determine what instrument lay most precarious atop the mound of interconnected dependencies, and determine a good bet on its likelihood of failure as compared to that of less dependent instruments? [1]
...Or did I just describe something that has already been done or dismissed/invalidated/etc? It gives me the same vague suspicion I got as a fresh undergrad having just independently theorized file compression for the umpteenth time (many students having learned some basics of information theory do this if they don’t already know how compression works.)