“The risk of disaster has always posed an existential problem for finance”

VSovid-19, war in Ukraine, climate, galloping inflation…Homo economicus seems taken aback by this bad series. Is finance able to cover these risks? At first, yes. In fact, you can find everything in the bazaar of financial products: from general public assets (stocks, bonds) to the most exotic (synthetic put option, perpetual indexed bond).

But what we find there above all are insurance products: nothing to do with what your broker offers you, although the idea is more or less the same. It is, in fact, skilful combinations of financial assets, able to go well when everything is bad, of portfolios delivering some financial compensation in the event of undesirable events. And disasters are indeed undesirable events.

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This idea of ​​“risk coverage” is not new, in truth. It is, quite simply, one of the greatest results of theoretical finance fifty years ago. At the time, the professor of economics Robert C. Merton (Nobel in Economics in 1997 with Myron Scholes) published a famous article, “An Intertemporal Capital Asset Pricing Model” (Econometrica No. 41, 1973).

risk aversion

This article reminded the world of finance that investors want to see their savings grow, especially when they really need it. This very last point is a significant nuance compared to “old finance”, which only recommended that savings should supplement current income. However, Merton recalls that we will be all the more sensitive to the argument of “good investment” if these savings have the good idea to resist when the world is collapsing, for example in the event of Covid-19 or Russian invasion.

Theoretical finance will say it in its own words that its most ardent supporter, Professor John H. Cochranewill have made more accessible to all: “Knowing that financial assets sometimes perform well and sometimes not so well, investors will want these assets to perform well especially when they really need them, and that they behave less well when they don’t really need them. need “ (“Financial Market and the Real Economy”, Working Paper no. 11193, NBER, 2005).

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Think of Covid-19, which has made you particularly sensitive to the health shock. From now on, you are ready to pay dearly for values ​​linked to medical research, but less for values ​​linked to tourism. The difference is the price to pay to bear your aversion to the risk of a new health crisis.

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