Monday, December 8, 2008

Excelsior Risk Management

Paul K has the video of Nassum Taleb on Charlie Rose.

From the talk, I'd guess that Taleb over-estimates the momentum for change.

It still amazes me just how much risk management topics are popularized or topical. I never pegged this field as one with "legs", as they say. That's neither here nor there, though.

Just as a matter of fact, the notion that financial market distributions are non-Gaussian has been around since the 1960s. It's not clear how Nassum intends to actually manage/run a firm's risk, in the case of non-finite variances ... (perhaps I should read the book? D'oh!).

VaR, even at 2-sigmas, was never meant to be a catch-all risk measure, was it? Accordingly, it just sounds like firms have another round of risk measurement to go through and that folks, like RiskMetrics, have been over-priced for a long time now (and out of the public view - who called them to Washington to testify, eh?). No one complains about their Executive salaries, the amount they collected from Wall Street for what so many are saying are worthless measures.

CMOs blew up. The still exist, today. CDOs blew up. The will exist tomorrow. The products will change and maybe the investor classes will get more targeted. Did you notice that the latest Moody's CDO model - at least in the advert I glanced at yesterday, incorporates i-th-to-default modeling? That suggests that people may be getting smarter about the credit risks they agree to sell short.

There will continue to be a market for "everyday risk" asset-classes. As John Templeton once said, "What are you going to do? Sell everything and wait for the world to end?"

What we do not know is whether those who leverage "everyday risk" will ... "endure", for lack of a better phrase. You'd think not, but you might be wrong.

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