Extreme risks

Events that could have a significant impact on economic growth

December 1, 2017

Extreme risks are potential events that are very unlikely to occur (and therefore infrequent) but that could have a significant impact on economic growth and asset returns, should they happen. We argue that a robust risk management approach should not stop at a particular percentile (whether VaR95  or VaR99.5) and a holistic risk management framework should include very unlikely, but potentially high impact, events.

We would like to argue that extreme risks matter and they deserve more attention than they have been given thus far.

By way of context, we have identified 15 extreme risks, categorised into three groups: financial, economic and ‘other’. ‘Other’ extreme risks related to environmental and political themes...Climate change, major war, Euro break-up, political crisis, infrastructure failure, protectionism and killer pandemic were included in this group.

In this new update, we have significantly extended our thinking in the ‘other’ group, breaking it down into four categories: political, environmental, social and technological. As a result, the total number of extreme risks we have identified has increased to 30, although most of the analysis hereafter is centred on the top 15 risks ranked by their importance.

The full report is available via the Download link.