Risk Management under Informational Asymmetry: to Differentiate Those Distinguishable

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V. Milovidov, Moscow State Institute of International Relations (University) of Ministry of Foreign Affairs, 76, Vernadskogo Prosp., 119454, Moscow, Russian Federation (vmilovidov@hotmail.com)



Abstract

The article explores the specifics of dealing with the informational asymmetry. The author reviews various institutional and operational approaches enabling investors to deal with such asymmetry. These include: financial intermediaries, information agencies and advanced information technology, market portfolio and asset pricing modeling, algorithmic financial strategies and high-frequency trading, option strategies as well as personalized portfolio selection based on perspective assumptions theory. All of them could help investors to minimize the risks. However, none of them could serve as a comprehensive solution. Moreover, in practice they produce additional risks and conflicts of interest. The most known example is principal-agent problem. Under these circumstances one of the key investor’s goal is to increase his own ability to deal with informational asymmetry and market uncertainty. That is, investor wants to acquire a greater sense for choosing proactive risk management strategy and for not be fooled by randomness. Author believes that cause-effect relation drives most of all market events. How to deal with uncertainty and informational asymmetry while assuming that investor’s ability to collect and process all existed information is limited? It would be worth for any investor (or, broadly speaking, for any kind of economic actors) to focus their attention to the most meaningful informational signals or events which differ markedly from others. It is also suggested that such events may cause further meaningful effects. To define such informational signals author refers to well known “butterfly effect”. Similarly to the meteorological exponentially developing processes, in economic and social sphere we may find Exponentially Scalable Events, or ESE. ESE is meaningful informational event, which catalyzes significant changes in human economic and social life. Investor’s capability to recognize ESE helps to predict and properly assess the potential market fluctuations, thus to reduce long-term risks.


Keywords

informational asymmetry, uncertainty, determinism, randomness, femtorisks, exponentially scalable event


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For citation:
Milovidov V. Risk Management under Informational Asymmetry: to Differentiate Those Distinguishable . Mirovaya ekonomika i mezhdunarodnye otnosheniya, 2015, No 8, pp. 14-24



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