The Emperor has no Clothes: Limits to Risk Modelling

Jon Danielsson

FMG Special Papers from Financial Markets Group

Abstract: This paper considers the properties of risk measures, primarily Value-at Risk (VaR), from both internal and external (regulatory) points of view. It is argued that since market data is endogenous to market behavior, statistical analysis made in times of stability does not provide much guidance in times of crisis. In an extensive survey across data classes and risk models, the empirical properties of current risk forecasting models are found to be lacking in robustness while being excessively volatile. For regulatory use, the VaR measure is lacking in the ability to fulfil its intended task, it gives misleading information about risk, and in some cases may actually increase both idiosyncratic and systemic risk. Finally, it is hypothesized that risk modelling is not an appropriate foundation for regulatory design, and alternative mechanisms are discussed.

Date: 2000-10
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.lse.ac.uk/fmg/documents/specialPapers/2000/sp126.pdf (application/pdf)

Related works:
Journal Article: The emperor has no clothes: Limits to risk modelling (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fmg:fmgsps:sp126

Access Statistics for this paper

More papers in FMG Special Papers from Financial Markets Group
Bibliographic data for series maintained by The FMG Administration ().