Illusion of control

Danielsson published a book with Yale University Press in 2022 titled Illusion of control where he challenges to the conventional wisdom surrounding financial risk, providing insight into why easy solutions to control the financial system are doomed to fail.

Artificial intelligence and systemic risk

Danielsson, with co-authors, has been studying how artificial intelligence affects financial stability and systemic risk, finding that while AI is likely to make most risk management and micro prudential regulations cheaper and more efficient, systemic risk is set to rise. The reason is that AI makes the problem of procyclicality, manipulation and optimization against the system worse than the current human centered set up. They have a recent published paper on the topic, Artificial Intelligence and Systemic Risk ^[8] and a blog Artificial intelligence as a central banker ^[9]

Central bank reaction to COVID-19 and moral hazard

Danielsson, with co-authors, has been studying how central bank reaction to Covid-19, such as macro prudential relaxation, liquidity injections and FX swaps were perceived by the financial markets. They find that the policy interventions were successful in the short term calming of financial markets, but raise serious questions about long-term moral hazard, see, The Calming of Short-Term Market Fears and Its Long-Term Consequences: The Central Banks’ Dilemma.^[10]

The drivers of financial crises

Danielsson and co-authors have studied the problem of how risk affects the likelihood of crises, motivated by Minsky’s observation that stability is destabilizing. Their research, Learning from History: Volatility and Financial Crises ^[11] finds that prolonged period of low risk make future financial crises will likely. Furthermore, the longer a low risk environment last, the bigger the impact on future economic growth, first positive and then negative, as shown in The Impact of Risk Cycles on Business Cycles: A Historical View.^[12]

Problems with risk measurements

Danielsson has authored a series of discussion papers on risk and models,^[13][14] as well as appearing in notable events with major policy makers.^[15]

Danielsson and his colleagues^[16][17] have expressed concerns about systemic risk measurements, such as SRISK and CoVaR, because they are based on market outcomes that happen multiple times a year, so that the probability of systemic risk as measured does not correspond to the actual systemic risk in the financial system. They argue that systemic financial crises happen once every 43 years for a typical OECD country and that measurements of systemic risk should target that probability.

Danielsson has published two books on forecasting financial risk.^[18] One is an introduction to practical quantitative risk management with a focus on market risk, while the other is on financial stability^[19] and uses economic analysis to frame the discussions on the international financial system.