PORTFOLIO MANAGEMENT AND SYSTEMIC RISK IN THE AGE OF ARIFICIAL INTELLIGENCE

Abstract

Artificial intelligence has emerged as a transformative force with profound implications for diverse domains, including finance and portfolio management. This paper delves into the multifaceted impact of AI on portfolio management and the dynamic landscape of systemic risk. The proliferation of AI is fueled by rapid advancements in computational capabilities, the abundance of extensive datasets, and breakthroughs in AI algorithms. It offers unparalleled accuracy, speed, and practical applicability, revolutionizing traditional paradigms. Globalization and AI applications have amplified systemic risks on a global scale, necessitating a reevaluation of risk management strategies. Conventional portfolio theories, like Modern portfolio theory, have historically emphasized the diversification of idiosyncratic risks while downplaying systemic risk. The comprehension and effective mitigation of systemic risks are paramount to preserving financial stability, particularly in the aftermath of systemic crises such as the 2007 2009 financial meltdown. AI's transformative potential extends beyond risk management, reshaping the labor landscape in asset management. Forecasts anticipate substantial job reductions in the field, prompting professionals to embrace adaptability and acquire new skill sets. This paper examines AI's integration into portfolio management, shedding light on the intricate interplay between AI, systemic risk dynamics, and investment practices. In conclusion, the integration of AI into portfolio management heralds an era of unparalleled opportunities and complex challenges. AI's capacity to process vast datasets, enhance pattern recognition, and refine predictive modeling has reinvented investment methodologies. However, this paradigm shift comes with inherent risks, especially pertaining to systemic instability. Identifying, understanding, and mitigating these risks is pivotal for sustaining financial market. Collaborative efforts among industry experts, regulators, and AI developers are instrumental in fostering responsible and sustainable AI integration within financial markets. As AI continues to exert its influence, professionals must remain adaptable and acquire new competencies to navigate the evolving financial landscape effectively. The future of portfolio management lies in harnessing AI's capabilities while safeguarding against potential pitfalls, ultimately steering the financial sector toward greater efficiency and resilience.