Dear Sidharta,

Another topic on the same page as the ones we have discussed, but with a new twist.

CDS are designed to spread risk, and they fit their purpose. There are two edges of this sword, as shocks may be spread and be absorbed, or spread and be amplified. So, i would say it's a tough question, with a tough answer.

Best regards

Bradut

Dear Dr. Bolos,

As you have said quite correctly, the perceived risk is a double edged sword. The discussion on the previous thread has yielded a good deal of information about Risk, as you have brought risk into the topic, based on which I propose a novel hypothesis that the CDS and leverage create a new kind of risk in the financial markets, this so called "Artificial Market Risk" or AR. Equally praiseworthy is Graeme's theory of the Ratio of Artificial Risk : Natural Risk which could be an important parameter to diagnose systemic fragility before they can take violent shape.

This whole theory could be extended forward since there are no such mention of AR in the current financial literature, and a full paper / research can be undertaken to analyze, understand and explain what this Artificial Risk is, and then classify this risk according to your three divisions you have proposed (low, medium and high risk), and compute the ratio we can call it 'Graeme's Risk Ratio' to derive the systemic fragility index (SFI).

I think this could indeed be a new area for research since this perceived artificial risk is a "derived risk" all sourced from those underlying products which model systemic risk. The underlying assets are more or less benign assets but the risk associated with the derived instruments may turn malignant. As you have mentioned above, the risk gets amplified and might generate shocks which often is too big to be absorbed.

What do you think about such a possibility?

Thanks,

Regards,

Sidharta