Modeling of Financial Crises: A Critical Analysis of Models Leading to the Global Financial Crisis
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The causes of financial crises are multiple but the models of financial crises revolve around four generational models. In this paper, the authors analysed the models and highlighted the fact that each model was adapted to specific situations to explain the financial crises faced rather than being visionary or systematic in approach in the four generation models. These models suggest crises may develop without significant change in economic fundamentals, since policies usually respond to changes in economy and agents consider these when forming expectations. Therefore, any set of indicators together may not provide the over-all picture but interactions among indicators should be pursued. Common sense and guesswork is used but is not sufficient for representing real behaviour. Modelling suggests that stressed or fraudulent companies should be removed to avoid further crises. While the new models handle a wider range of nonlinear behaviour, little new work is in fact evident. Apart from patchwork-like approach of the past, financial or currency crises modelling have not been dealt with systematically it seems. A new way thinking is not emerging suggesting a visionary and dynamic robust mathematical modelling approach is needed with attention given to the many possible risks.
Global Journal of Business Research
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