When it comes to risk management, what matters more--the risk model itself or the decisions that result from findings of the risk modeling? A new article on the University of Pennsylvania's Knowledge@Wharton Web site, "Re-thinking Risk Management: Why the Mindset Matters More Than the Model," discusses precisely that. Richard J. Herring, co-director of the Wharton Financial Institutions Center and professor of international banking, looks into the "limitations of models" in risk management--why didn't they work for companies this time? Are the models "broken" or is the "the decisions that get made based on them," that are faulty?
Last fall when short sales of certain companies were banned, there was great controversy about whether this made the equity markets more or less volatile than the underlying crisis did. EDHEC Finance Professor Abraham Lioui, of the Risk and Asset management Research Centre in Nice, Lille and Paris, France found that, "Market volatility rose sharply because there was no clarity on the reasons behind the measure," and that "The impact of the ban on market volatility was greater than the impact of the financial crisis." The study, "The Undesirable Effects of Banning Short Sales," released Aril 16, is available here.
