Thread by @gianlucac1

ON EPIDEMIC, RISK AND FINANCE 3d
I am in the finance business. I deal in equities. Therefore i price risk in the most risky part of the capital structure

Think about a company: Market value is W= debt+equity
if this was 60+40=100 and the market prices W is now 80
1/n

providing no change in bankruptcy risk pricing (ie debt is still priced at par), equity goes to 20 (-50%) while W is only -20%
Avoiding these is what i do for living.
Agents dictate pricing and there is nothing you can do if not taking notice when this happens
2/n

you cannot contend the risk pricing by agents. It happens. If it is wrong, time will tell. You can go against it (namely you buy more equity lower down) but you have to have staying power (money) until your pricing proves correct

what this has in common with epidemiology?
3/n

Think about Covid19.
The mortality risk from being infected is very different in age cohorts
ht @zorinaq
I mean it shifts up pretty similarly in all ages but the absolute number differs a lot

what this means?
4/n

it means that different ages will price the different risk in a different way.
And therefore in absence of Mandated Orders, they will adapt their behavioral response accordingly

so the reaction of London and the UK should come with no surprise
5/n
news.sky.com/story/covid-19…

And this is why controling an epidemic a la Swedish (soft law) doesnt work. That is why you need MANDATES

Simply because people price THEIR OWN risk perfectly.
30yers old or less will not care much

strange ah? No

6/n

This perfectly priced behaviour, being part of a NETWORK this is not sufficient to control an epidemic coz these "rational agents" can be part of a contagion chain, that spills over into other age classes, with enormous damages

7/n

So personal risk is priced well. But this doesnt guarantee that collective (in finance it is called systemic) risk is priced well.

these are also defined as negative externalities in macroeconomics
8/n

Even under the assumption of a "collective good will" of these age classes, to price risk Collective perfectly you would need perfect info at personal and collective level.

But we know that the bulk of SarsCov2 contagion takes place in pre-simptomatic or asymptomatic phases
9/n

So we aint never in perfect personal info.

That is why the call for "responsability of individuals in controlling the epidemic" makes me laugh.

Responsability of a pre symptomatic? of an asymptomatic? They dont know they are
so come back with another one please. this is bs
10/n

on a systemic level we know that clusters, variants and so on can spike up at any time. And the exponential behavior of the contagion gives you no time to react.
The damage is done before you react

11/n

Similarity with finance? think about the greek crisis and the contagion in the EU Government market in 2011.

Or Lehman bankruptcy

2 clusters. World gone.

Pretty much the same than SarsCov2 ah?

When this financial contagion stopped?
12/n

In the US when the treasury attracted the US banks to the treasury credit merit by injecting preferred shares in EVERY BANK

IN EU with the whatever it takes by Draghi and the OMT/QE by the ECB

No behavioral spontaneous resolution
13/n

Italy is re-opening as of the 26th of April amid a decently high contagion number

Trusting on behavioral response and vaccine campaign

I hope the Government is right

But i think that surveillance and monitoring by regulators is needed
TTT isolation and financial support
14/n

have to be designed in order not to LD again

and i see very little of those
15/n
@AurelianoStingi @Doom3Gloom @ThManfredi @CrossWordsCW @mtizzoni @ciro

personal thx to @CT_Bergstrom @GidMK @mlipsitch @alexvespi @vcolizza @ikashnitsky @svscarpino as reading them among others, i learnt a lot

16/16

oooops i forgot @Di_SPACE_Lauro

PS FOR FINANCE PUNDITS

SarsCov2 contagion is equivalent to a risk in shadow banking. You dont see it until Archegos comes up

Then you count the damages

PS #2

That is why Vespignani and others run billions of simulations when modeling and use metapopulation layers

Exactly to capture different "pricing" aka different behaviors

and that is why their modeling is much better than traditional "rational agent" economic modeling

SORRY FOR SOME TYPOS IN
7) (this to be erased)
9) (perfectly to be erased)