A Fuzzy Characterization of Uncertainty in Financial Crises

Abstract

The so-called first and second generation models focus on fundamentals as the main cause of a crisis. During the 1990s many developing economies underwent structural reforms, which lead to an improvement of those fundamentals. Hence, at that time, the stability of the domestic financial systems seemed basically guaranteed. However, this confidence was shattered by the outbreak of the financial crises of the second half of the decade. Some of them were certainly due to weak fundamentals in the affected economies. But other crises seemed to be engen-dered just because of wrong or misleading perceptions on the part of economic agents. The paper argues that a main source for these misperceptions is the way in which agents hedge their funds, on the basis of their assessment of the inner workings of the financial system. To support this claim, a simple model with a fuzzy measure of the risk of assets is introduced.