Risk Quanta: An Approach to Understanding Modern Financial Risk

Abstract

This paper presents a recent history of developments and innovations that, along with advances in information technology, have caused fundamental changes in the way that financial risk is created, transformed, transported and extinguished in modern financial intermediation systems. A review and critique of the global supervisory response to these developments is presented. In light of these changes, a bottom-up approach to the capture, recording, disaggregation, re-composition and measurement of new, standardized, basic elements of risk that we refer to as risk quanta is proposed. The approach is then extended to other disciplines in a broader, more integrated socio-economic context. This approach provides a clearer understanding of the financial world that we live in today, and creates a robust information platform to build innovations, advancements and economic growth in the future.

Keywords: Quanta, Risk, Financial, Models, Contracts, Aggregation, Regulation, Supervision, Global, Institutions

JEL Classification: D82, G2, G28