The Economist, 2004. - 256 pages.
When did mode risk management begin? It was an extraordinary collision of extreme conditions in financial markets in the 1980s and a dramatic increase in computer power. In the space of a few years, outcomes which could be tested only by intuitive sketches on the back of an envelope, or worked out after weeks of cranky iterations on a calculator, were replicable in minutes on a desktop computer.
Monte Carlo simulations, chaos theory and neural networks have all attempted to get closer to modelling real financial markets. Of course a model will never be the real thing, and those who put too much faith in their financial model will get caught out, as the boffins at Long-Term Capital Management (a hedge fund which collapsed in 1998) spectacularly illustrated. Ultimately, even financial firms have leaed that mathematics has limited value in calculating the probability of the most bizarre and extreme events.
When did mode risk management begin? It was an extraordinary collision of extreme conditions in financial markets in the 1980s and a dramatic increase in computer power. In the space of a few years, outcomes which could be tested only by intuitive sketches on the back of an envelope, or worked out after weeks of cranky iterations on a calculator, were replicable in minutes on a desktop computer.
Monte Carlo simulations, chaos theory and neural networks have all attempted to get closer to modelling real financial markets. Of course a model will never be the real thing, and those who put too much faith in their financial model will get caught out, as the boffins at Long-Term Capital Management (a hedge fund which collapsed in 1998) spectacularly illustrated. Ultimately, even financial firms have leaed that mathematics has limited value in calculating the probability of the most bizarre and extreme events.