Dynamics Instabilities in Sovereign Debt and Financial Markets

Raphael Douady, Université Paris I Panthéon- Sorbonne

In this conference, Raphael Douady analyses the dynamics that give rise to market instability. The impact of the increase in the financial leverage of the economy produces a hyper-reaction of the market operators to the variations in their profits. If the revenue of the banks diminishes, they reduce their loans en masse; if company sales decrease and they cannot adjust their liquidity with further loans because of the existing debt, they need to immediately reduce their spending, fire staff and cancel investments. This hyper-reaction produces a mechanism of bifurcation and, in the final analysis, a strong dynamic instability in the capital markets commonly referred to as the systemic risk.

Instabilities in financial markets |  Symposium for the 202^nd anniversary of the decree of the foundation of the Scuola Normale Superiore | 18^th October 2012 | Sala Azzurra