Monday, 5 January 2009

Risk mismanagement

There's an interesting NYT article here about the role of Value at Risk in the run up to the crisis. Taleb crops up quite a bit understandably, but it's more sympathetic to the role of VaR than he is (not difficult really).


Nick Drew said...
This comment has been removed by the author.
Nick Drew said...

It's a good, balanced article and the people quoted (with one notable exception !) make good & balanced statements

Taleb has just been silly since Black Swan: by contrast, Fooled by Randomness very properly lauds Monte-Carlo analysis. Now VaR can be approached through 3 methods: the original Gaussian (assuming log-normal distributions, not normal BTW); Historical; and Monte Carlo.

As eny fule kno, Monte Carlo is the way to go (as the pre-Swan Taleb says): the problem is that it takes an age to compute, versus seconds to do the other methods. All this talk of the '4:15' report relates to a Gaussian VaR done to give a quick-n-often-a-bit-dirty answer for immediate action. Its limitations are very well-known

Incidentally, nowhere mentioned in the article is the fact that VaR is itself a subset of a more general concept called CaR (C = Capital), which removes one of the most limiting aspects of VaR, namely that it assumes perfect liquidity over the relevant 'holding period' (which itself should only be 1 or 2 weeks at max for the maths to work, but is better when it is properly measured only in days)

CaR assumes an 'infinite' holding period (i.e. doesn't assume you can dump a position quickly if it's moving against you, a fundamental premise of VaR); is more subtle & complex; & can't be done at the press of a button at 4:15 each day, but rather should be chewed over in much the way GS reportedly did in the anecdote.

Overall I would say gaming, and wilful (compulsory!) institutional optimisim, lie at the heart of the 'analytic' problems. I rarely meet a senior risk manager who doesn't have a very shrewd idea of what the real risks are, but they are 'strongly urged' to keep their own counsel: the dealmakers rule the universe and they just don't wanna know: it has negative consequences for dealflow and bonus !

the risks that VaR measured did not include the biggest risk of all: the possibility of a financial meltdown: OK, so "now we know this" (of course we always did), what we gonna do about it ??? Beyond the 95% (or 99%, as will now become the very costly norm) lies (a) diversification and (b) sovereign support. Just as no industrial organisation can economically afford to create a "100%" physically safe workplace, no financial system can economically afford cover against all the ultra-extremes.

You end up taking the 17th / 18th C approach of actually banning all derivatives, which is just childish. This said, there are some extreme instruments that should be effectively banned - by making the conventional / mandatory calculation of the risk involved so costly (in terms of Capital Adequacy) that no-one will enter them

or admit they've entered them ... which brings us back to locking a few more of these bastards up! Pragmatic risk management takes several forms ...

Tom P said...

Hi Nick

sorry for taking ages to reply, I don't know what to add though as you obviously know this area a lot better than I do! agree about Taleb becoming a bit silly. I thought Fooled By Randomness was the better of the two books.

Anonymous said...


麻將,台灣彩卷,六合彩開獎號碼,運動彩卷,六合彩,線上遊戲,矽谷麻將,明星3缺一,橘子町,麻將大悶鍋,台客麻將,公博,game,,中華職棒,麗的線上小遊戲,國士無雙麻將,麻將館,賭博遊戲,威力彩,威力彩開獎號碼,龍龍運動網,史萊姆,史萊姆好玩遊戲,史萊姆第一個家,史萊姆好玩遊戲區,樂透彩開獎號碼,遊戲天堂,好玩遊戲,遊戲基地,無料遊戲王,好玩遊戲區,麻將遊戲,好玩遊戲區,小遊戲,遊戲區,電玩快打,cs online情趣用品,情趣,情趣商品,A片,AIO交友愛情館,AIOAV女優,AV,A漫,免費A片,本土自拍,自拍,愛情公寓,情色,情色貼圖,色情小說,情色小說,情色文學,色情,寄情築園小遊戲,色情遊戲,色情影片,情色網,色情網站,微風成人區,微風成人,嘟嘟成人網,成人,18成人,成人影城,成人圖片區,成人圖片,成人貼圖,成人文章,成人小說,UT聊天室,聊天室,豆豆聊天室,哈啦聊天室,尋夢園聊天室,聊天室尋夢園,080中部人聊天室,080聊天室,中部人聊天室,080苗栗人聊天室,苗栗人聊天室,免費視訊聊天,免費視訊,視訊聊天室,視訊聊天情趣用品,情趣,情趣商品,愛情公寓,情色,情色貼圖,色情小說,情色小說,情色文學,色情,寄情築園小遊戲,色情遊戲,AIO交友愛情館,一葉情貼圖片區,情色論壇,色情影片,色情網站,微風成人區,微風成人,嘟嘟成人網,成人,18成人,成人影城,成人圖片,成人貼圖,成人圖片區,成人文章,成人小說,A片,AV女優,AV,A漫,免費A片,自拍,UT聊天室,聊天室,豆豆聊天室,哈啦聊天室,尋夢園聊天室,聊天室尋夢園,080中部人聊天室,080聊天室,080苗栗人聊天室情趣用品,情趣,情趣商品,愛情公寓,情色,情色貼圖,色情小說,情色小說,情色文學,色情,做愛,寄情築園小遊戲,色情遊戲,AIO交友愛情館,AIO,色情影片,情色網,微風成人,嘟嘟成人網,成人,18成人,成人影城,成人圖片,成人貼圖,成人圖片區,成人文章,成人小說,成人電影,麗的色遊戲,自拍,A片,AV女優,AV,A漫,視訊交友網,視訊,視訊交友,免費視訊聊天室,免費視訊,視訊聊天,視訊聊天室,UT聊天室,聊天室,豆豆聊天室,哈啦聊天室,尋夢園聊天室,聊天室尋夢園,中古車,二手車情色貼圖,日本A片,A片下載,情色A片,AV女優,A漫,免費A片,微風成人,成人網站,成人光碟,嘟嘟成人網,成人,成人影城A片,A片,A片下載,做愛,成人電影,18成人,日本A片,情色小說,情色電影,成人影城,自拍,情色論壇,成人論壇,情色貼圖,情色,免費A片,成人,成人光碟