From: John Conover <john@email.johncon.com>
Subject: Assessment of Risk
Date: Thu, 23 Oct 2008 23:45:57 -0700
Alan Greenspan gave Congressional testimony today on the causes of the
current economic recession:
http://www.computerworld.com/action/article.do?command=viewArticleBasic&articleId=9117961
and is interesting because, in his opinion, one of the major causes
was inaccurate risk models.
A lot of work went into the risk models of the "Quantitative Analysis
of Non-Linear High Entropy Economic Systems," series of articles-more
than half of the article's text is dedicated to evaluation of
financial risk. Of particular interest is:
http://www.johncon.com/john/correspondence/020217114704.27107.html
which explains the log-normal distribution of system evolution in
financial time series, and:
http://www.johncon.com/john/correspondence/060828101013.7889.html
which uses the Laplacian distribution of the marginal increments for
assessment of financial risk.
Most prevailing models use a normal/Gaussian distribution for both,
which can lead to substantial errors in the evaluation of risk over
extended time intervals. These errors, coupled with inadequate data
set sizes, probably mislead the financial industry into a very
optimistic assessment of systemic risk exposure, (which took down
LTCM, a decade earlier, too.)
John
--
John Conover, john@email.johncon.com, http://www.johncon.com/