Risk Management is like a Greek Tragedy, where actors laugh to express their sorrow. Hence, here what mimics laughter is the Normal (Gaussian) PDF and its assumptions.
I believe the strongest voice that emerged in the Post - Crisis years was that of Dr Nassim Taleb, who heavily criticized risk management models and techniques that assume the Normality of returns, and its volatility in financial markets.
The Credit derivatives aka structured products that were financially engineered by Wall Street and the City Quants to provide a market-beating returns used such techniques to pool assets having negative correlations and a low joint probability of default or time to default
Hence, completely overlooked how asymmetric correlations and extreme tail events(extending beyond 3 standard deviations) could complicate market and credit risk hedging in the event of a full-blown non - -normal financial crisis!
Gaussian Copula well and truly assumes that a financial risk statistical model will exhibit control properties on most of the days (Similar to the Gauge R & R - Repeatability & Reproducibility Analysis done in the Industrial cum Reliability Engineering field/s
to measure measurements/ standards) for a chosen confidence level and a risk horizon, but on the contrary, it did not live up to its reputation in backtesting.
This model that was brought into use by Quants/ Financial Engineers was idealized by the Chinese Economist and Quant Dr Andrew Lee (from China) who was working on Wall Street.
Hence, it is crucial to read this article to get the hang of the full story and how it devastated the world economy back in 2007!
One big reason for the model’s failure was the lack of data samples available in the market to model the #CDS - Credit Default Swap and #CDO - Credit Default Obligations losses with accuracy.
This led to complacency when undertaking model validation by the #MBS Portfolio Product Developers and Marketers.
However, a successful risk/ pricing model would require not just validation but also cross-validation using training _ testing data split technique used in data science and machine learning.
Professor Li didn't do any of that!
Please click on the URLs below to get the full story behind this financial engineering/ risk management model and its apocalyptic characteristics.
Recipe for Disaster: The Formula That Killed Wall Street
pdfs.semanticscholar.org/d6a2/26e54cff1…

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Risk Manager(Banks,Asset Management,Insurance)

Risk Manager(Banks,Asset Management,Insurance) Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

More from @SAH16928046

13 Jun
What's wrong with Biostatistics is analogously related to the question that was put by the Queen to the Economists at the LSE after the GFC.
The Queen wondered why didn't the economists see it coming?
of course, health pandemics are different, but, the statistical models are not
Scholars working in the biomedical sciences, epidemiology, and #biostatistics spheres, rely on mathematical and applied statistical computing based on modelling assumptions that rely on historical data set observations.
The past cannot and will predict the future with certitude.
Even with Quantum Computing, Data Sciences, Machine Learning, Artificial Intelligence, or any other form of computer-aided Predictive Analytics, scholars across the domains of natural and social sciences will never be able to capture the emergence of rare #Black #Swan #Risks!
Read 12 tweets
11 Jun
There is an obscure problem when you join the BIG-4 Advisory or auditing, or consulting side of the profession within the services sector.
Most of the co-workers come from an #Accounting background, which makes things awfully difficult to communicate and interpret.
I remember working with an #Audit Expert, having a BIG-4 background.
The chap didn't understand anything except for debit, credit, and fraud risk.
The assignment required to be sophisticated Actuarial Finance, Mathematics, and Econometric Skill Sets to understand the GAPS.
Hence, the biggest problem in the Financial Risk Management, #ERM, Quantitative Risk Management, and other FE Financial Engineering related risk management processes, when working with a #BIG4 Firm, is the interaction with Accountants and Auditors who have their own Lingua Franca
Read 12 tweets
8 Jun
How does a middle office risk management job differ from a risk management job on the trading floor?
@garp @PRMIA @actuarynews @SOActuaries @irmglobal
TMO - Treasury Middle Office roles differ from bank to bank.
In other non-banking financial institutions, MO roles may vary according to portfolio size and responsibilities handed over to the risk management team.
MO is primarily responsible for overseeing trading (front office) activities and applying controls, and reporting violations thereof.
Read 18 tweets
7 Jun
How did getting a #PhD harmed your career?
This question was put to me on another forum.
I am sharing my answer for the benefit of this community.
Interesting to read such pessimistic accounts of life again and again! I think if the word goes out, most of the universities will be facing a shortage of students and hence that leads to a lockdown / shut down or a possible global academic research meltdown.
So let us not overdo this criticism!

I would like to answer this from a knowledge capital formation and a global development perspective, based on my interaction with PhD degree holders across various nations of the world.
Read 18 tweets
6 Jun
Just analyzing some postgraduate degrees offered by the universities across #Newzealand.
The fees are way above the global market rate, and, it appears, they overcharge students for extending their stay, which is akin to obtaining a legit work permit.
Education is big business!
Secondly, what is the guarantee that an international student will get a like-minded job, at a place of his choosing?
A work permit does not translate into a fantastic professional career!!
A basic three-year work permit, might not be enough to earn well after investing so much
I always say to my students, who would like to go overseas, that the grass appears greener on the other side.
Your imagination and perception might force you to acquire the wrong beliefs about foreign education.
A degree is a piece of paper! that's all.
What matters is your luck
Read 4 tweets
4 Jun
Is CFA better than PhD in Finance?
How can you compare a doctoral research program with a professional qualification awarded by a professional body?

CFA is an entry pass/ticket.
People with no background in Finance, Accounting and Economics, are asked to do a CFA to prove and improve their skill sets across the Capital Markets, Investment Banking, Financial Brokerage and Asset Management Sectors.
My friend who is a PhD is running a CFA / Financial Training Institute.

All those who pass out after level III, refer to the PhD as “SIR”.

Got my point?

So no comparison!
Read 5 tweets

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Too expensive? Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal Become our Patreon

Thank you for your support!

Follow Us on Twitter!

:(