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Tuesday, January 13, 2009

VaR: The Good, The Bad, and The Ugly (with a Black Swan or Two Thrown In)

Joe Nocera at the NY Times recently wrote a very long (and very nice) piece on current risk management practices titled Risk Mismanagement. Among the topics touched on:
  • A short, intuitive, and accurate explanation of VaR (Value at Risk)
  • A pretty good history lesson on the development of VaR at JP Morgan in the late 80s and early 90s.
  • You can't have an article on risk management without Nassim Taleb*. So, of course he makes an appearance.
  • A description of some of the ways VaR is used in practice. Not surprisingly, the "testbook" treatment of VaR doesn't come anywhere close to telling the whole story.
And even better, it's a pretty easy read. Check it out here.

* Paul Wilmott has said (tongue in cheek, I'm sure) that he mentions Nassim Taleb occasionally on his blog because it increases traffic from Google searches. That's definitely not something I'd do. No. Never. Well, hardly ever...

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