6891508
Description
Models
- VAR
- Single asset class
- Bell curve
- Normal market conditions
- Exacerbate diversification
- Separate lending and risk
- Fundamental rules of banking: default risk is inevitable liability of business
- Fundamental rules of banking: default risk is inevitable liability of business
- Turner Review
- ST observation period.
- Network risks-> self enforcing cycles.
- Paradox: Systemic risk highest when measured risk lowest
- Take on more risk
- Take on more risk
- Risk vs uncertainty and systemic vs idiosyncratic
- ST observation period.
- Apotheosis of 50 years of FE.
- Complete fallacy-> blind faith in models.
- Net risk less than risk of either two investments.
- Endogenous risk e.g. uncertainty.
- Single asset class
- Gaussian Copula
- Simple elegant ease accuracy ubiquitous
- Spark of mathematical legerdemain
- CDS prices-> implicit assumption price risk correctly.
- No look at underlying
- Constant correlation rather than mercurial.
- Taleb- charlatanism.
- Taleb- charlatanism.
- Black boxes.
- Regulators risk measures derived from model
- Legitimacy
- Legitimacy
- Conformity-> compounded risk.
- Simple elegant ease accuracy ubiquitous
- Robhini
- Not black swan-> white swan events remarkable predictable.
- Enthusiastically embraced 20% yearly increase in prices.
- Not black swan-> white swan events remarkable predictable.
- Frank Knight
- Uncertainty cannot be priced
- Uncertainty cannot be priced
- Fama
- Markets are utterly rational and efficient.
- Random walk became conventional wisdom.
- Markets are utterly rational and efficient.
- My View
- Religious faith in models
- Financial wizards carried away in euphoria
- During market upheaval 'all correlations go to one'.
- Exacerbated by one stop shop
- Religious faith in models
- Stiglitz
- 1987 'Once in a lifetime crash-> one in every billion years.
- 10 years later LCTM.
- 10 years later LCTM.
- Financial markets do not learn-> people running models do not look at history.
- 1987 'Once in a lifetime crash-> one in every billion years.
- Rajan
- Linkages between markets and institutions.
- Exposed to large systemic shocks.
- Fat tail risks.
- Keynes
- Future inherently unpredictable-> no mode.
- Future inherently unpredictable-> no mode.
- Keynes
- Euphoria leads to SS.
- Exposed to large systemic shocks.
- Linkages between markets and institutions.
- PA Problem
- Moral hazard.
- Myopic destructive incentives
- Myopic destructive incentives
- Moral hazard.
- Copycat behaviour e.g. Asch visual experiment feel left out.
- Crazy ones those not in market.
- Crazy ones those not in market.
- Cassidy
- Market strong self-equalibvrating tendencies.
- GD historic anomaly-> error of MP converting recession into cataclysm
- GD historic anomaly-> error of MP converting recession into cataclysm
- Disaster Myopia
- Representative Heuristic
- Rational irrationality
- Prisoners dilemma
- Drunks staggering down the street
- Synchronous lateral excitation
- Market strong self-equalibvrating tendencies.
- Samuelson
- Physics of avalanches
- No equilibrium relaitons-> economic dislocations.
- Displace snow in path which adds weight and force
- No equilibrium relaitons-> economic dislocations.
- Physics of avalanches
- Mansharamani
- LCTM never had a monthly loss greater than 3% prior to 1998.
- Likelihood 1 in 50 million.
- Likelihood 1 in 50 million.
- Over/undershooting no unique equilibrium no self correcting self reinforcing.
- LCTM never had a monthly loss greater than 3% prior to 1998.
- Low cross regional correlation.
- LCH
- Take no account of most important determinant-> self control.
- Take no account of most important determinant-> self control.
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