Thomson Financial has launched its first sector-based risk indicator for the general financial sector, and that it is partnering with the World Economic Forum to develop predictive markets contracts on the probability and potential impact of global non-financial risks.

The Thomson Financial risk indicator for the general financial sector (which includes investment banks and investment management companies but not insurance companies) finds that financial risks are the most significant for the sector, comprising just over two-thirds of risk; geopolitical risk in the Middle East accounts for a relatively significant portion of risk at just under one-third; whereas, terrorism has a statistically insignificant impact on the sector. “The risk from a bird flu pandemic is clearly an issue, but the specific impact of an outbreak remains to be quantified,” it notes.

The model breaks down risk to the sector into its key component parts. The model then aggregates these risks to provide a balanced view of risk across the sector, highlighting movements in the overall risk profile to the sector.

Currently, the information that governments, corporate executives, investors and the financial community receive on potential non-financial risks can be sensational in nature and may emanate from a tiny pool of experts, which often means that the prevailing view can be biased, it notes. Research shows that market-based predictions generally outperform pundits and polls, as markets excel in aggregating all available information generating a more objective consensus about the future.

In order to assess the probability and potential impact of an avian flu pandemic, Thomson has partnered with the World Economic Forum to develop predictive market contracts to provide a key data input into the sector risk model. The aim is to encourage as many participants as possible to participate in these markets, which can be found at: http://weforum.newsfutures.com/

In order to assess the potential impact of bird flu on financial markets, a market has been created to allow participants to predict the impact on the Dow Jones Industrial Average based on a number of scenarios in relation to the spread of the bird flu virus. This will be assessed against the contract which predicts the number of countries to report a human case of avian flu in 2007. Thomson says that predictive markets can be harnessed to bring together all of the information that exists, thus providing a more balanced and accurate view of the real risks.

Jesse Fahnestock, Global Leadership Fellow, The World Economic Forum commented, “Most global risks are difficult or impossible to assess quantitatively, but in today’s competitive and interconnected business environment, understanding these risks is increasingly important. Predictive markets aggregate collective wisdom, helping to overcome perceptual and cognitive biases, and could be an excellent tool for investors and other decision makers struggling to understand the potential impact of risks such as avian influenza.”

Thomas Aubrey, investment management director, Thomson Financial added, “The key to successful risk management is to focus on those risks that truly matter and ensure that the impact of these risks is understood and mitigated. Thomson Financial’s risk indicators help provide corporate executives with a balanced approach to understanding the new risk paradigm — highlighting those risks, be they financial or non-financial, which are really relevant”.