"Des waerelds doen en doolen, is maar een mallemoolen,"

"Des waerelds doen en doolen, is maar een mallemoolen," engraving from Het Groote Tafereel der Dwaasheid, 1720.

"The actions and designs of the world go round as if in a mill." South Sea bubble financial crisis.

Thursday, September 26, 2013

The main function of financial systems?

Is now clearly to allocate risk, instead of capital. What purpose serve catastrophe bonds if not diversifying risks? this one exemple might not be enough to argue the functional shift of an entire industry, but one has to note nevertheless that catastrophe bonds might have done well because they are not correlated to stock markets....where prices are supposed reflect all known information and rational market participants act accordingly. Rational actors of financial systems have to resort to gamble on natural disasters to diversify their portofolio, showing once more (as if we needed more proof by now) that financial markets are not efficient at reflecting fundamentals. 

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