Models and Risk - Blog

There a lot of evidence that models are less than perfectly reliable.

When designing models, the underlying assumption is often that the model captures the true data generating process.

Much of the analysis of the recent market turmoil is amusing.

There has always been conflict between macro- and microeconomic regulation.

Last January I looked at how the Swiss FX shock affected the most popular risk measures.

The Greek and the Icelandic crisis have much in common, not the least the heavy pressure from foreign countries and the hectoring from their public officials.

The long-running Greek crisis and China's recent stock market crash are the latest threats to the stability of the global financial system.

Some financial authorities have proposed designating asset managers as systemically important financial institutions (SIFIs).

I have been in a conference for the past few days, and have seen a few presentations on macropru type regulations.

It is important that we understand and do something about systemic risk.

LSE report warns that forcing financial institutions to forecast risk in the same way could mean they will all end up being caught unawares.

I got to talk about Greece on the radio show Sprengisandur, if you understand Icelandic.

Iceland has just announced it is getting rid of its capital controls.

Bloomberg today had an interesting piece, called Market Moves That Are Supposed to Happen Every Half-Decade Keep Happening.

I got to participate in a discussion on capital controls, sponsored by Samtök Atvinnulífsins which could be translated as the Icelandic Chamber of Commerce.

Regulators and financial institutions increasingly depend on statistical risk forecasting.

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.

This column introduces a new Vox eBook collecting some of the best Vox columns on financial regulations, starting with the fundamentals of financial regulations, moving on to bank capital and the Basel regulations, and finishing with the wider considerati…

The proposed EU capital markets union aims to revitalise Europe's economy by creating efficient funding channels between providers of loanable funds and firms best placed to use them.

So, does ES capture tail risk, but VaR not?

The Swiss central bank last week abandoned its euro exchange rate ceiling.

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 event, and also looking at the risk of the inverse FX.

Risk forecasting is central to financial regulations, risk management, and macroprudential policy.

Basel III is coming into focus.

Europe is set to finally approve new insurance regulation, Solvency II.

Central banks frequently lead the macroprudential policy implementation.

Icelandic voters recently ejected its post-Crisis government - a government that successfully avoided economic collapse when the odds were stacked against it.

Cyprus has imposed temporary capital controls.

Is the fact that different banks have different risk models problematic?

The current EZ crisis is not Europe's first sovereign-debt crisis.

October 2011 saw the latest draft of Solvency II, the European Union's code for regulation of the insurance industry.

October 2011 saw the latest draft of Solvency II, the European Union's code for regulation of the insurance industry.

The IMF has emerged from the global crisis bigger and more powerful.

According to the IMF, Iceland has graduated from its Fund-supported programme with unqualified success.

Much of macroeconomic policymaking is trial and error.

A debate is raging on capital adequacy requirements for banks.

Financial risk models have been widely criticised for both theoretical and practical failures, especially during the recent financial crisis.

Risk models are at the heart of the financial sector's self-monitoring as well as supervision by regulators.

Icelanders have voted against providing a government guarantee for claims made by the UK and the Dutch governments against Iceland's deposit insurance fund.

A delicate regulatory question is under consideration on the capital (reserve) requirements at the heart of Solvency II (the insurance industry equivalent of Basel III), which is scheduled to come into effect by 2013.

In crises, insurance companies' asset values may fall significantly without a corresponding drop in their liabilities.

Financial models are widely blamed for underestimating and thus mispricing risk prior to the crisis.

Icelanders may well reject the terms of the financial deal with Britain and the Dutch in a March referendum.

The Icelandic parliament has decided to apply for EU membership.

Bank bonuses have been blamed for contributing to the crisis, and regulators and politicians are now demanding changes in compensation arrangements.

Many are calling for significant new financial regulations.

By incorporating endogenous risk into a standard asset-pricing model, this column shows how banks' capacity to bear risk seemingly evaporates in the face of market turmoil, pushing the financial system further into a tailspin.

Much of today's financial regulation assumes that risk can be accurately measured so that financial engineers, like civil engineers, can design safe products with sophisticated maths informed by historical estimates.

Some view Iceland's crisis as holding lessons for any country with an outsized financial sector, e.g. the UK.