A Framework for the Analysis of Unfolding Financial Crises

A novel event becomes financially relevant (i.e., a novel risk) if it causes-or threatens to cause-a financial crisis. While novel events are all different, financial crises have much in common with each other. Furthermore, from an investor ' s point of view, a crisis is never a single event but rather a process: an unfolding sequence of connected events requiring a sequence of specific responses. This article presents a framework for understanding financial crises by analyzing them in terms of eight phases spanning the build-up to a crisis, the crisis itself (often catalyzed by the emergence of a novel risk), and the aftermath. The framework is intended to be granular enough to provide perspective on specific investment decisions that must be made in real time, while anchoring them within a long-term perspective. The exposition refers to the Global Financial Crisis of 2007-2009 but concludes with a case study applying the framework to the events of March 2023, a very different crisis.