The so-called “tail risk”, in economic management, is the risk of statistically unusual events with the capacity to decisively impact the markets. Now, taking into account the current pandemic and confined situation in the world, experts at Deutsche Bank have calculated how high the probability of a new global crisis in the next ten years is.
Tail risks, like COVID-19, are fortunately rare compared to others shocks From the market. However, they are more frequent than most people think, and pandemics are just one example, “said the specialists, who considered four possible scenarios.
According to one of them, in the world there could be a great influenza pandemic that it would kill more than two million people (the probability of occurrence within a year is 2%). The second scenario suggests that it will take place a catastrophic volcanic eruption with an explosive index (IEV) of 7 degrees (0.15% probability), while the third predicts a big solar flare (1.06%) and the fourth talks about a global war (0.625%).
According to the binomial distribution law, if the probability of an event occurring during a year is 2%, then within a decade its probability of occurrence will already be 16.7%. The events examined by Deutsche Bank can be considered as independent, so it is possible to add up their probabilities.
Thus, it turns out that the probability of any of them occurring before 2030 is 33.5%. From a 20-year perspective, the estimate already increases to 55.7%.
On the other hand, experts did not analyze risks as extreme as the impact of an asteroid, since it is considered extremely unlikely. However, such an event cannot be classified as impossible either.
What effects could such cataclysms have?
Specialists stress that the year 2020 has already shown how destructive a global pandemic can be. Thousands of deaths, city blockades, the fall in global GDP and unemployment are some of the effects suffered by the new coronavirus.
Regarding the second scenario, the bank recalled the eruption of the Icelandic Eyjafjallajokull volcano in 2010, which affected the economy and disrupted air traffic throughout northern Europe. And their experts point out that that eruption was weak compared to an IEV-7 index, in which the volume of ash emissions exceeds 100 cubic kilometers.
An event as powerful as that took place the last time in Indonesia, in 1815, and killed tens of thousands of people. Today, such an eruption would endanger not only the lives of people living nearby: it would severely limit air traffic and affect global temperatures, which could decrease due to air pollution by ash.
As an example of a powerful solar flare, Deutsche Bank cited the 1859 solar storm, known as the Carrington event, that caused telegraph systems to fail across Europe and North America.
The possibility that a mega-call from a large solar storm will impact our world, has become very worrying when we arrived, according to new estimates, a not inconsiderable 1 in 8 chance.
Currently, a similar event could cause serious damage to contemporary infrastructure, which is linked to electronics. Telecommunications would be disrupted, payment systems could stop working, and GPS satellites would experience interference, causing problems for industries that rely on precise positioning, including aviation.
The scenario of a global war was considered the least probable, but its realization cannot be completely ruled out. And the consequences would be drastic.
Source: Deutsche Bank
