Posts from the long tail:

Risk

A failure of all offices

September 19, 2011

UBS releases further details about their rogue trader, but fail to describe how the fraud was possible.

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Unknown unknowns

September 19, 2011

After observing a pair of poorly-rebadged cars, a series of thoughts about Rumsfeld's "known knowns," "known unknowns," and "unknown unknowns."

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A funny thing happened on the way to the downgrade

August 9, 2011

The most interesting thing about yesterday's market action was the behavior of the Treasury market: It rose. If the market collapse was really about investors reacting negatively to the United States' new, lower credit rating, why on earth would replace their stocks with a direct investment in that very same government? We can only know [...]

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More on models

October 19, 2010

Justin Fox asks, "Why didn't people in finance pay attention to Benoit Mandelbrot?" -- and it's a great question. His conclusion: I think it’s mainly that he didn’t provide them a handy alternative to Black-Scholes. I can’t pretend to fully understand the practical implications of his fractal view of markets, but it does seem more [...]

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Risk & risk management

June 30, 2010

An overview of financial risk and the risk management process.

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Professor Risk

December 13, 2009

David Spiegelhalter is the Professor of the Public Understanding of Risk at Cambridge University. He has recently produced the following video to encourage better practices in the casual perception of risky behaviors: I think it's a brilliant video and would love to have been one of Professor Spegelhalter's students. I firmly believe that the study [...]

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Philosophies of risk management, briefly

November 18, 2009

My last post made me think of a common question in risk management: "what is risk?" A lot of time is spent deciding the various metrics, exposures, values, sensitivities, etc. that are considered "risks." In the previous post, a simple change of perspective - is risk defined by dollars invested or shares controlled? - resulted [...]

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Stock is more efficient than options are more efficient than stock

November 18, 2009

Investment decisions can hinge on how risk and exposure are defined. Here, the choice determines whether an insider should trade in stock or options.

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Haven't we seen this movie before?

October 14, 2009

In a recent profile of KKR, Breakingviews.com (via the NYTimes) attempted to value the company by taking a look at Blackstone's operations. I don't have any comment on the analysis itself, but two excerpts stood out in my mind: [Blackstone] didn’t do as well collecting performance fees and investment gains because its holdings have been [...]

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The rise of VaR

October 1, 2009

Simon Johnson and James Kwak take a look at how VaR got to be so popular in the first place. They make the insightful observation that a bad (or at least an incomplete) model can gain acceptance not only because of its simplicity but, oddly, because of its output as well. Indeed, VaR succeeded not [...]

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Measuring aggregate risk in CDS markets

September 25, 2009

The ECB recently published this lengthy report (PDF link) on the state of the CDS market, with particular focus on counterparty risk. It is well worth a read for either a cursory overview or more in-depth look at the mechanics and concerns of that market. Section 3.4 regarding counterparty risk measures was especially interesting to [...]

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Yet more risky testimony

September 11, 2009

Nassim Taleb and Chris Whalen also participated in Wednesday's House hearing on risk management. The full text of their remarks are available here (Taleb) and here (Whalen). Taleb's thoughts are familiar, consisting largely of his well-known opinions on VaR and financial regulation. Whalen, however, provides an excellent quote: The problem is not with models themselves. [...]

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Bookstaber's testimony on risk

September 11, 2009

Rick Bookstaber testified to the House on Wednesday regarding risk management; the text of his remarks is available here. It is a must-read. The bulk of his testimony focuses on VaR: it's use, misuse and role in the recent crisis. I find his greatest insight in this paragraph: I remember a cartoon that showed a [...]

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Deconstructing the Gaussian copula, part III

August 11, 2009

The intuition behind copula models: dependence, correlation, single factors and more.

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Deconstructing the Gaussian copula, part II and a half

August 11, 2009

An aside on static recovery assumptions in CDO pricing.

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VaR at risk

July 31, 2009

In a piece called "The Risk Mirage," BusinessWeek assails its peers for falling for VaR-based evaluations of Goldman's risk levels: [A] VaR-based analysis of any firm's riskiness is useless. VaR lies. Big time. As a predictor of risk, it's an impostor. It should be consigned to the dustbin. Firms should stop reporting it. Analysts and [...]

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Deconstructing the Gaussian copula, part II

July 9, 2009

A math-free introduction to CDO pricing.

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Interviewing Myron Scholes

May 16, 2009

Speaking of LTCM (and of this Sunday's Times Magazine, for that matter), here's an interview that's going to run with Myron Scholes, who comes off like a bad comedian. The questions are poor and the answers arguably worse. Let's take a look, shall we? The second question: "You're known as the intellectual father of the [...]

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Aggravation (but keep reading)

May 16, 2009

I happen to like this article by Niall Ferguson for the Times Magazine, in particular this bit: Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or [...]

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Monte Carlo: house of cards?

May 8, 2009

The WSJ recently ran apiece on Monte Carlo risk management: Here is how a typical Monte Carlo retirement-planning tool might work: The user enters information about his age, earnings, assets, retirement-plan contributions, investment mix and other details. The calculator crunches the numbers on hundreds or thousands of potential market scenarios, guided by assumptions about inflation, [...]

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How to lose your money without really trying

April 27, 2009

An author describes a lose-lose strategy.

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A casualty of chance

April 20, 2009

I discovered this Atlantic article ("Why I Fired My Broker") on MB's blog.  I came to enjoy it in the end, but while I was reading it I was struck by how representative it is of contemporary financial journalism.  This is the new cookie cutter article: naive reporter is encouraged by rich capitalists to invest, [...]

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Thoughts on risk management

April 20, 2009

Naked capitalism put out an open call for thoughts on the state of risk management on trading desks. The comments are well worth a curious read (how many times have you said that about a blog post?). It is interesting that when you get enough academics and practitioners shouting in a room, risk management becomes [...]

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Models are just the tool

April 17, 2009

I'm a big fan of Emanuel Derman.  His memoir My Life as a Quant tells the story of a young physics Ph.D. who stumbled into finance and eventually became the head of Goldman Sach's Quantitative Risk Strategies group.  He currently oversees the financial engineering program at Columbia University and is the CRO of Prisma Capital. Today [...]

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Signs of the apocalypse

February 24, 2009

Wired has published an article attacking the Gaussian copula: Recipe for Disaster: The Formula That Killed Wall Street. It's a very typical "hate the game, not the player" article which finds fault with a tool rather than the people who use it. Not that I completely disagree with the critique - but imagine my surprise [...]

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Not if Jerome Kerviel has anything to say about it

February 9, 2008

SocGen is Risk Magazine's Equity Derivatives House of the Year.

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