Jón Danielsson is an economist working as professor of finance (reader) at the London School of Economics.[ Viewpoints: Where now for capitalism? The Economist, 19 September 2008][ Jon Danielsson: The bill equates to £40,000 per family, The Independent, 6 January 2010]
Toghether with Hyun Song Shin he is credited with coining the term endogenous risk. Danielsson claims such risks are at cause of most Financial crisis.
Danielsson received his PhD in economics from Duke University in 1991, and began working at the LSE in 1997. He has also spent time at the Bank of Japan and the International Monetary Fund (IMF). In 2012, he was named director of the LSE's Systemic Risk Centre (SRC), which conducts research on financial crises and risk as well as financial regulation.
Career
Danielsson's research areas include
systemic risk, artificial intelligence,
cryptocurrency,
financial risk,
, financial regulations, market volatility,
Market liquidity, models of extreme market movements, and microstructure of foreign exchange markets.
[ Bio in Financial Markets, Institutions & Instruments, Volume 17, Issue 1, pages 1–4, February 2008] He has written extensively on the post-crash situation in
Iceland.
[ with Gylfi Zoega, “The Collapse of a Country,“ 12 March, 2009][ "Lessons from a Collapse of a Financial System," with Sigridur Benediktsdottir and Gylfi Zoega, Economic Policy Fifty-Second Panel Meeting Hosted by EIEF, 22-23 October 2010 ]
In 2012, he became director of the Systemic Risk Centre (SRC) at the London School of Economics, which was set up to study the risks that may trigger another financial crisis and to develop tools to help policymakers and financial institutions become better prepared. The Centre is funded by ESRC with an annual budget of £1 million.
Illusion of control
Danielsson published a book with Yale University Press in 2022 titled
Illusion of control where he challenges to the conventional wisdom surrounding financial risk, providing insight into why easy solutions to control the financial system are doomed to fail.
Artificial intelligence and systemic risk
Danielsson, with co-authors, has been studying how artificial intelligence affects financial stability, where they emphasize the importance of considering how known channels of financial system fragilities interact with AI societal risks.
1. Malicious Use of AI: AI can be exploited by profit-driven agents to manipulate systems, engage in socially undesirable activities, or conduct illegal actions like rogue trading and state-sponsored attacks.
2. Overreliance on AI: Excessive dependence on AI, especially in areas with scarce data, can lead to poor policy decisions and increased systemic risk due to AI’s confident but incorrect predictions.
3. AI Misalignment: AI systems might not follow intended objectives due to conflicting goals (profit, legality, ethics), leading to destabilizing behavior, particularly during financial stress.
4. Market Structure: AI development is concentrated in a few large firms, creating systemic risk through harmonized beliefs and actions among market participants, amplifying financial booms and busts.
While AI is likely to make most risk management and micro prudential regulations cheaper and more efficient, systemic risk is set to rise. The reason is that AI makes the problem of procyclicality, manipulation and optimization against the system worse than the current human centered set up. They have several recent published paper on the topic, On the use of artificial intelligence in financial regulations and the impact on financial stability,[ Artificial Intelligence and Systemic Risk, August 2021] and several blogs, like How the financial authorities can take advantage of artificial intelligence[ Artificial intelligence as a central banker, March 2020]
Central bank reaction to COVID-19 and moral hazard
Danielsson, with co-authors, has been studying how
central bank reaction to Covid-19, such as macro prudential relaxation, liquidity injections and FX swaps were perceived by the financial markets. They find that the policy interventions were successful in the short term calming of financial markets, but raise serious questions about long-term moral hazard, see,
The Calming of Short-Term Market Fears and Its Long-Term Consequences: The Central Banks’ Dilemma.
[ The Calming of Short-Term Market Fears and Its Long-Term Consequences: The Central Banks’ Dilemma, May 2021]
The drivers of financial crises
Danielsson and co-authors have studied the problem of how risk affects the likelihood of crises, motivated by
Hyman Minsky’s observation that stability is destabilizing. Their research,
Learning from History: Volatility and Financial Crises [ Learning from History: Volatility and Financial Crises, 2018] finds that prolonged period of low risk make future financial crises will likely. Furthermore, the longer a low risk environment last, the bigger the impact on future economic growth, first positive and then negative, as shown in
The Impact of Risk Cycles on Business Cycles: A Historical View.
[ The Impact of Risk Cycles on Business Cycles: A Historical View, October 2020]
One-in-a-thousand-day problem
Danielsson coined the term
one-in-a-thousand-day problem arguing financial crises usually inflict the most damage when banks suddenly shift from pursuing profits to survival. Concluding that such drastic behavioural changes render statistical analyses based on normal times ineffective. That is why we cannot predict the likelihood of crises, or what banks will do during those crises. Since this behaviour arises from a natural desire for self-preservation, it cannot be regulated away.
Problems with risk measurements
Danielsson has authored a series of discussion papers on risk and models,
[ Model Risk of Risk Models, SRC Discussion Paper No 11, April 2014][ Risks Models-at-Risk SRC Discussion Paper No 8 January 2014] as well as appearing in notable events with major policy makers.
[ Kuroda Says BOJ Doesn't See Asset Bubbles Forming, March 2014, Bloomberg]
Danielsson and his colleagues
Danielsson has published two books on forecasting financial risk.[ Financial Risk Forecasting, Wiley (March 25, 2011)] One is an introduction to practical quantitative risk management with a focus on market risk, while the other is on financial stability[ Global Financial Systems, Pearson, Aug 2013] and uses economic analysis to frame the discussions on the international financial system.
Recent publications
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"Artificial Intelligence and Systemic Risk" 2021 with Robert Macrae and Andreas Uthemann. Journal of Banking and Finance.
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"Learning from History: Volatility and Financial Crises" 2018 with Marcela Valenzuela, and Ilknur Zer. Review of Financial Studies.
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"Model risk of risk models" 2016 with Kevin James, Marcela Valenzuela and Ilknur Zer. Journal of Financial Stability.
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"Can we prove a bank guilty of creating systemic risk? a minority report"* 2016 with Kevin James, Marcela Valenzuela and Ilknur Zer. Journal of Money, Credit and Banking.
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"Fat Tails, VaR and Subadditivity", 2013, with Casper de Vries, Bjorn Jorgensen, Gennady Samorodnitsky and Sarma Mandira. Journal of Econometrics.
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"Risk Models-at-Risk", 2014, with Christophe M. Boucher, Patrick S. Kouontchou and Bertrand B. Maillet. Journal of Banking and Finance
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"Global financial systems: stability and risk", 2013, Pearson PLC
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"Robust Forecasting of Dynamic Conditional Correlation GARCH Models", 2013, with Kris Boudt and Sebastien Laurent. International Journal of Forecasting
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“Endogenous and Systemic Risk", 2012, with Hyun Song Shin and Jean–Pierre Zigrand, NBER Volume on Measuring Systemic Risk, University of Chicago Press.
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"Endogenous Extreme Events and the Dual Role of Prices", 2012 with Jean–Pierre Zigrand and Hyun Song Shin, Annual Reviews in Economics, Volume 4 on the Economics of Extreme Events.
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Financial Risk Forecasting, 2011, Wiley
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"Exchange Rate Determination and Inter–Market Order Flow Effects", 2012, with Jinhui Luo and Richard Payne, European Journal of Finance
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"Liquidity determination in an order-driven market", formerly "Dynamic Liquidity", 2012, with Richard Payne, European Journal of Finance.
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"On the Impact of Fundamentals, Liquidity and Coordination on Market Stability", with Francisco Penaranda, 2011. International Economics Review, 52 (3). pp. 621–638.
External links
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