Fear of flying

The most dangerous flight I ever took was in a ten seater plane going to the smallest of Ireland’s Aran Islands. The danger was not so much the size of the plane as landing on Inis Meain, the last of the three islands, so there were five take-off and landing events to survive.

According to a new measure of risk proposed by Luca Anderlini and Leonardo Felli on the website Vox EU, that trip had an SVI of three. The Systemic Vulnerability Index they suggest would measure the risk of an indirect security in extreme market conditions by assuming additional risk is added with every layer. Thus if you buy a German government bond yourself, that has an SVI of 1. If you commission a bank to buy it and sell you a mirror image contract, that has an SVI of 2. A CDO squared could have an SVI of 3 or 4.

On the sunny day when I flew hopped over Galway Bay, the risk of each take-off and landing was so low that even the combination was insignificant. Had it been stormy, I might have considered waiting for a direct flight, unwilling to take the risk so many times.

In normal times, the SVI of a security would be uninteresting, since the chances of any of the layers defaulting would be so low. During periods of significant market instability, however, the difference between an SVI of 1 and an SVI of 3 would be important.

At first glance, this seems like a reasonable way to think about the kind of risk the use of complicated financial instruments might introduce into a portfolio, allowing investors to consider some of the disadvantages of the complexity in a more measured way.

Back on the Aer Arran flight we had a different method of risk management – at each landing and takeoff, everyone on the plane apart from myself and the pilot crossed themselves devoutly.

About the blog

FTfm is no longer updated but it remains open as an archive.

FTfm's specialist writing team offer their insights into the global fund management industry.

About the authors

Pauline Skypala has been editor of FTfm for four years having previously been deputy personal finance editor. She joined the FT in 1999 and has been writing on savings and investment issues throughout her career.

Steve Johnson, FTfm deputy editor, has been a journalist for 17 years, 10 of which have been with the FT.

Sophia Grene, reporter on FTfm, has been a financial journalist in print and online for 12 years.

Ruth Sullivan has worked as a financial/business journalist and foreign correspondent and for the past 10 years has been at the FT.