Editor: Steve Satchell
Published: 01 Apr 2009
Papers in this issue
by Yuval Millo, Donald MacKenzie
by Szymon Borak, Matthias R. Fengler, Wolfgang K. Härdle
by Marco J. van der Burgt
by Deepak Jadhav, T. V. Ramanathan
University of Cambridge
The background of this editorial is that of an angry and vindictive press looking for entities to blame for the financial crisis. While bankers' bonuses have taken the brunt of the attack, Quants have also been assaulted. One popular commentator, who has sprung to fame on the basis of some rather poor books, has been very aggressive indeed. Within the Quant profession, risk model validators are vulnerable in exactly the same way that rating agencies are. . . they sign off and bound risk in a manner that can be undone by subsequent events. It is for these reasons that I welcome the following papers that address directly issues involving the overlap of the credit crisis and model validation.
Our first paper, by van der Burgt, deals with the impact of business cycles on the model validation process. The author finds evidence of two business cycles based on Standard & Poor’s default rates. He also analyses the crisis in terms of Hyman Minsky, someone who I approve of and who is fast becoming a prophet of our times.
The second paper, by Millo and MacKenzie, is an unusual edition to our journal in that it looks at risk management from a sociological perspective. This is quite different from what we normally publish, but, nevertheless, is tremendously interesting and makes an important contribution to the area. An earlier version of this paper had appeared in the journal Accounting, Organizations and Society but since the overlap in readership between the two journals is probably zero I thought it a good thing to include it here.
The third paper is a more familiar analysis by Jadhav and Ramanathan, which looks at parametric and non-parametric estimation of value-at-risk. The authors review existingmethods and include some new ones. It is found that non-parametric methods seem to do well in backtesting.
The final paper by Borak et al looks at the use of implied volatility factors in improving the hedging efficiency of barrier options. This paper is a little less about risk model validation but includes practical procedures of hedging efficiency assessment, which will be of value to model validators in a number of contexts. As before, the journal continues to grow both in terms of readership and the quality of its submissions.We clearly have a negative beta with the financial market but we hope that the growth will continue in better times in the future.
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