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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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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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Self-defeating systems

October 3, 2009

Last night, trying to catch a cab in a Manhattan rain, it occured to me that it really shouldn't be so surprising that so many of our systems fail exactly when we need them most. I was standing blocks from the nearest subway or bus and had no umbrella; I needed a cab to get […]

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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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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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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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On the age of empiricism

May 1, 2009

Caught this on Rortybomb - Barry Eichengreen has penned an excellent piece on the role of models in academia and finance, as well as the growing importance of empiricism (a point with which I particularly empathize).  An excerpt: Maybe so. But amid the pervading sense of gloom and doom, there is at least one reason for […]

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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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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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