The risk you measure is probably not the risk you care about
The risk we measure is usually not the risk we care about. Why and does it matter?
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64 posts in this category
Climate risk does not affect systemic financial risk
Climate risk is not a systemic financial risk. Folding it into financial regulations will likely backfire, not mitigate climate damage and even increa…
Read moreRisk and scientific socialism
Modern financial risk forecasting has much in common with scientific socialism, relying on pseudoscientific models that can create a false sense of se…
Read moreThe one-in-a-thousand-day problem
Financial crises usually inflict the most damage when banks suddenly shift from pursuing profits to survival. This column argues that such drastic beh…
Read moreWhich is better, ES or VaR?
Almost everyone insists that Expected Shortfall (ES) is superior to Value-at-Risk (VaR). But is that truly the case?
Read moreRisk forecasting models are least reliable when needed the most
When measuring model risk with risk ratios, we find it highest when markets are in turmoil. In other words, model risk is highest, and the risk forec…
Read moreOn the ideal properties of risk measures
What are the ideal properties of risk measures? Should we disregard VaR because it is not subadditive? Did the Basel Committee make a mistake by movin…
Read moreWhat genuinely predicts financial crises?
Only two variables predict financial crises: Credit growth and low risk. Everything else is the consequence of a crisis already happening. It is point…
Read moreWhy so many crises happen when we know why they happen and how to prevent them
Financial crises are not complicated, and many claim to know why they happen and how to prevent them. Why then do they happen with such alarming frequ…
Read moreWhen risk models hallucinate
Risk model hallucination happens when models are forced to forecast the likelihood of extreme events in cases where they have not been trained with su…
Read moreOn the perils of regulating an infinitely complex financial system
The financial system is infinitely complex, so the supervisors can only patrol a small part of it, why it is so hard to regulate finance effectively.
Read moreBuffers or shock absorption in regulating finance
There are two main approaches to macroprudential regulations. The first is the current one of identifying all risks and using them to build buffers ag…
Read moreWhat Silicon Valley Bank and Credit Suisse tell us about financial regulations
The downfall of Silicon Valley Bank and Credit Suisse has exposed failures in how we regulate the financial system. This column argues that the proble…
Read moreLessons from the collapse of Silicon Valley Bank
The collapse of Silicon Valley Bank shows that banks still pose risks. Are they systemic? While it is unlikely that the failure of SVB will lead to a …
Read moreIs risk a fate or a choice?
The prevailing view seems to be that financial risk is a fate not a choice. Even ChatGPT thinks so. As we manage our financial affairs, we are in cont…
Read moreThe magic of riskometers
The way financial risk is measured is by a device I have called the riskometer. It is a fantastic thing, plunge it into the bowels of the City of Lond…
Read moreHow to manipulate risk forecasts and not get caught
It is easy to manipulate risk forecasts. If your regulator or compliance officer sets a risk target you don't like, just tell them what they want to h…
Read morePerceived and actual risk
Perceived risk is risk predicted by models, and actual risk is the fundamental underlying risk. We measure perceived risk and care about the actual ri…
Read moreThe McNamara fallacy and the financial Authorities
We missed the excessive build-up of risk before 2007 despite having all the numbers and models right in front of us. Now we have doubled down on model…
Read moreClimate risk and financial risk
Systemic risk and climate change strongly affect each other. Unfortunately, a lot of research promising to tell how, does no such thing. Because of a …
Read moreWho believes risk can be measured?
I have long argued that risk, especially extreme risk, cannot be measured. A lot of people disagree. Who are they?
Read moreWhy the risk you measure is probably not the risk you care about
The risk we measure is usually not the risk we care about. Why and does it matter?
Read moreSanctions, war, and systemic risk in 1914 and 2022
The Western countries have sanctioned Russia in a way not applied to any globally integrated major power in over a century, ever since 1914. This colu…
Read moreHow global risk perceptions affect economic growth
The relationship between financial risk and economic growth is complex. This column finds that perceptions of high risk unambiguously harm growth, whi…
Read moreMisleading concepts of risk
A common misconception maintains that different notions of risk capture the same concept: VaR, ES and volatility all measure the same "true" risk". I…
Read moreThe risk management ritual
Financial risk management has become ritualised. It is more important to follow the correct procedures than to control essential risks. Why and what d…
Read moreMisleading measurements and garbage in - garbage out models of systemic risk
There are many measurements of systemic risk and a huge number of papers depend on those measurements. But is that work of any use? There is an archet…
Read moreEverybody working in the financial system has an incentive to increase its complexity, including the regulators
The almost infinite complexity of the financial system is the main reason why it is so hard to keep it under control. And that complexity is due to ev…
Read moreGlobal market risk
There are a million ways to measure financial risk, and if one wants to calculate global risk, it requires a truly heroic set of assumptions. But it's…
Read moreOn the future of Amazon
As Amazon continues its exponential growth, where will it all end? Growth has to stop, but when and why?
Read moreMoral hazard, the fear of the markets, and how central banks responded to Covid-19
While the direct economic consequences of Covid-19 have been significant, the impact on the financial markets has been more nuanced. This column uses …
Read moreOf Julia and R
I just tried the same code in R's data.tables and Julia's DataFrames, and the results are a bit surprising.
Read moreThe five principles of correct riskometer use
It is easy to criticise risk forecasting, but it's rather pointless unless one can come up with proposals. Here are my five principles for the correct…
Read moreThe problem with Backtesting
Backtesting is the magical technique that tells us how well a forecast model works. Test the model on history, and we have an objective way to evaluat…
Read moreThe coronavirus crisis is no 2008
Many comparisons have been made between the coronavirus crisis and the global systemic crisis in 2008. This column argues that seen through the lens o…
Read moreThe dissonance of the short and long term
The type of risk we most care about is long-term, what happens over years or decades, but we tend to manage that risk over short periods. This column …
Read moreThe 2018 market in a 250 year context
The financial markets did not have a good 2018 as the media kept on reminding us:
Read moreShort and long-term risk
The riskiest year in human history was 1962. The year of the Cuban missile crisis, the closest we ever came to a nuclear war. The mother of all tail e…
Read moreLow risk as a predictor of financial crises
Reliable indicators of future financial crises are important for policymakers and practitioners. While most indicators consider an observation of high…
Read moreYesterday's mini crash in a historical context
The stock market had a mini crash yesterday. So how big was that in a historical context?
Read moreHere be dragons
Medieval mapmakers noted the risk of an unknown kind by “here be dragons”. Attempts at measuring extreme risk should come with a similar warning. Just…
Read moreVIX, CISS and all the political uncertainty
Two widely used indicators of financial risk, the VIX index and the ECB's CISS are at a historical low. The (financial) world must be really safe. …
Read moreWhy it doesn't make sense to hold bonds
Investor demand for bonds is very high. This column argues that this is surprising because under almost any likely inflation scenario, including centr…
Read moreBig Banks' Risk Does Not Compute
A Bloomberg piece that cites our work, Big Banks' Risk Does Not Compute.
Read moreOf tail risk
Suppose one cares about tail risk, what is the best way to estimate it? There are two, not mutually exclusive, ways; statistical and structural. Whi…
Read moreModels and regulations and the political leadership
Why do the regulatory authorities seemingly fall into the category of model believers, if not quite to the view that there must be one true model?…
Read moreWhy do we rely so much on models when we know they can't be trusted?
There a lot of evidence that models are less than perfectly reliable. Why then do we rely so much on models in decision-making, and especially finan…
Read moreDoes a true model exist and does it matter?
When designing models, the underlying assumption is often that the model captures the true data generating process. Does a true model exist? To me,…
Read moreImpact of the recent market turmoil on risk measures
Last January I looked at how the Swiss FX shock affected the most popular risk measures. Events of the past week give us another interesting test.…
Read moreObjective function of macro-prudential regulations
I have been in a conference for the past few days, and have seen a few presentations on macropru type regulations.
Read moreRegulators could be responsible for next financial crash
LSE report warns that forcing financial institutions to forecast risk in the same way could mean they will all end up being caught unawares.
Read moreMarket moves that are supposed to happen every half-decade keep happening
Bloomberg today had an interesting piece, called Market Moves That Are Supposed to Happen Every Half-Decade Keep Happening. Here is their self-describ…
Read moreWhy risk is hard to measure
Regulators and financial institutions increasingly depend on statistical risk forecasting. This column argues that most risk modelling approaches are …
Read moreThe Danish FX event
Denmark had a small FX event on March 20, in the context of the Swiss FX shock, it is not much a of an event, but it does reinforce stereotypes.
Read moreWhat do ES and VaR say about the tails
So, does ES capture tail risk, but VaR not? Therefore the Basel committee is correct, and we all should use ES. Is that true?
Read moreWhat the Swiss FX shock says about risk models
The Swiss central bank last week abandoned its euro exchange rate ceiling. This column argues that the fallout from the decision demonstrates the inhe…
Read moreOn the Swiss FX shock
Just looked again at the what I did on the January 2015 Swiss FX shock, looking at how the various risk measures performed in the days after the even…
Read moreModel risk: Risk measures when models may be wrong
Risk forecasting is central to financial regulations, risk management, and macroprudential policy. This column raises concerns about the reliance on r…
Read moreThe appropriate use of risk models: Part II
Financial risk models have been widely criticised for both theoretical and practical failures, especially during the recent financial crisis. In the s…
Read moreThe appropriate use of risk models: Part I
Risk models are at the heart of the financial sector's self-monitoring as well as supervision by regulators. This column, the first of two, addresses …
Read moreRisk and crises: How the models failed and are failing
Financial models are widely blamed for underestimating and thus mispricing risk prior to the crisis. This column analyses how the models failed and qu…
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