Risk 2002 Europe: Risk management remains an ‘art’, says Breeden

Douglas Breeden, dean of the Fuqua School of Business at Duke University, said risk management remains an ‘art’ despite significant theoretical advances in the subject, using the example of disparate pricing in US mortgage securities to illustrate his point.

Speaking today in Paris at the opening session of Risk 2002 Europe, Breeden did not dispute the immense importance and usefulness of pioneering work such as Markowitz portfolio theory, Sharpe ratios, Black-Scholes option pricing and the theoretical developments that followed. “However, I don’t know of a real situation where you can completely hedge away all risk. There always remains that part of risk management that is art, rather than science,” he said. Breeden analysed various US dealers’