Category Archives: Risk and risk management

New York Times on Merrill’s Risk Management

The New York Times has an odd piece today, “Where Did the Buck Stop at Merrill?” which seeks to determine whether the unexpectedly $8.4 billion third-quarter writeoff was not just former CEO Stanley O”Neal’s failing, but also one of Merrill’s board. Another shoe may be about to drop, since the Wall Street Journal claimed that […]

The Role of Emotion in Risk Assessment

PhysOrg.com reports on the results of a study funded by the National Science Foundation which looked into why people decide to live in homes in risky places, like coastal Florida and areas where wildfires are common. Answer: “the emotional benefits interfere with their ability to assess the risks.” What is surprising it that this finding […]

More Doubts About Hedge Fund Performance

Hedge funds charge vastly higher fees than other money managers because they allegedly deliver better investment returns. Yet when you look at most hedge fund indices, they don’t look much better, and are sometimes worse than simple long-only strategies. And remember these indices almost certainly overstate performance, since they exhibit what is called “survivorship bias.” […]

Nicholas Taleb Attacks the "Pseudo-Science" of Modern Finance

Nassim Nicholas Taleb, seasoned trader and risk manager, and author of the provocative and well regarded book Black Swans, today in the Financial Times takes on the high priesthood of modern finance. He argues that modern portfolio theory and many of its offspring, such as the Black-Scholes option pricing model and the capital asset pricing […]

Securitization Ain’t What It Used to Be

A wry and informative article, “Slicing and dicing risk rebounds on banks,” by John Dizard at the Financial Times tells us that newfangled investment vehicles considered to be a good thing because it moved risk assumption away from large banks (and therefore ultimately central banks) to the wealthy. But Dizard explains the rich were too […]

Gillian Tett: The Perverse Effects of Value-at-Risk Models

In an interesting bit of synchronicity, the role of value-at-risk models has come into focus in the last couple of days. By way of background, VAR is a widely used risk management technique. It defines the level of risk by assessing the most one might lose in a set time period (typically one day) with […]

WSJ: Wide of the Mark on Valuation Difficulties

Forgive me for critiquing two Wall Street Journal articles in one evening, but the worst offender (this one) caught my eye second. It’s frustrating because this page one story, “U.S. Investors Face An Age of Murky Pricing,” attempts to explain the role of transparency, or more accurately, the lack thereof, in the recent credit market […]

Morgan Stanley’s Excuse for Dropping $390 Million in One Day

The problem with being public is that your dirty underwear gets exposed, and if you are an investment bank, that means you have to talk about embarrassing losses. Morgan Stanley announced that it lost $390 million in a single day in August. And of course, it was those pesky quant traders. And even worse, Morgan […]

Best Securities Reform Proposal

I am kicking myself that I didn’t come up with the proposal made by Brandeis professor Stephen Cecchetti in today’s Financial Times. His opinion piece, “A better way to organise securities markets,” is the single best idea for securities reform I have seen in a very long time. It is simple, elegant, and addresses many […]

"What Happened to the Quants in August 2007?"

Paul Kedrosky (of Infectious Greed fame) points to a a terrific paper by Amir E. Khandaniy and Andrew W. Lo of MIT, “What Happened to the Quants in August 2007?”. I’ll confess that I have only skimmed it, but it looks thoughtful, has all the right caveats (the researchers admit they may not have and […]

UBS: Latest Credit Market Casualty

The Wall Street Journal has broken the story that UBS will announce that it is writing down its fixed income book as much as 4 billion Swiss Francs, or roughly $3.4 billion, which will result in losses of 600 to 700 million SFr for its third quarter. Although this write-off is greater than those taken […]

Dizard on the Uses and Misuses of Financial Models

John Dizard of the Financial Times looks at the role of financial models in the recent market perturbations and argues that most observers are making the problem seem more complicated than it actually is. First, some firms had systems that were designed unduly for the convenience of the traders, and it proved way too easy […]

Martin Wolf: Banks Hold Central Bankers Hostage

In an intriguing article today, “The Bank loses a game of chicken,” Martin Wolf, the Financial Times’ chief economics writer, followed the lead of the Bank of England’s Governor Mervyn King in backing down from their shared view that central bankers should be willing to let all but those banks “too big to fail” go […]

The Journal Tells Us Quants Have Suffered

Readers have probably figured out that I think the reporting in the Wall Street Journal is overrated. We have a prime example on page one today, “How Market Turmoil Waylaid the ‘Quants’.” My understanding is that newspapers are in the business of providing news. The story that the quants are in trouble is a month […]

The Barriers to Bottom Fishing

John Dizard, in today’s Financial Times, tells us why, despite the fact that a lot of fixed income paper is on offer at very cheap prices, no one seems to be stepping to the plate. And his explanation bodes ill for things turning around very soon. The simple story is that even though the buys […]