The emperor has no clothes: Limits to risk modelling |
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| Institution: | 1. McDonough School of Business, Georgetown University, Washington D.C. 20057, United States;2. Monash Business School, Melbourne 3145, Victoria, Australia;3. NYU Stern School of Business, New York, NY 10012, United States;4. College of Business, Florida International University, Miami, FL 33199, United States;1. Dept. Fundamentos del Análisis Económico, Universidad de Alicante, Campus San Vicente del Raspeig, Alicante 03080, Spain;2. Westminster Business School, University of Westminster, 35 Marylebone Road, London NW1 5LS, UK;1. Institute of Engineering and Computational Mechanics, University of Stuttgart, Pfaffenwaldring 9, 70569 Stuttgart, Germany;1. Department of Psychology, Bar-Ilan University, Israel;2. School of Medicine, New York University, United States of America |
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| 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 may give misleading information about risk, and in some cases may actually increase both idiosyncratic and systemic risk. |
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