THE STUDY OF CRISES

James H. Scott

A study of financial crises can improve our understanding of theories, and of the relative strengths and weaknesses of different institutional arrangements. This article discusses four examples. (1) During the crisis, risk converged towards a global risk factor that dominated secondary risk factors. (2) Value is a secondary risk factor because it is closely related to this global factor. (3) Momentum did not behave like a risk factor. (4) The dealer market in subprime debt may have worsened the crisis by failing to provide liquidity or price transparency. As it is currently structured, the market increases systemic risk.