A Brief History of Valuation: A Personal View

Tanveer Bhatti

This article was first published as a chapter in Managing Illiquid Assets: Perspectives and Challenges, by Risk Books.

The end of the first decade of the 21st century witnessed a considerable development in the concept of fair value and of its measurement. This development came mostly from the accounting community, and it is a laudable achievement. It provides an underpinning of the galaxy of valuation issues, which benefit from a more technically informed dialogue.

Just as that other well-known galaxy, the Milky Way has a black hole at its centre, the nucleus of our valuation galaxy is the elusive concept of model risk. Understanding valuation from all angles, including how it is affected by model risk, is a vital aspect of managing illiquid assets. Establishing a competent valuation function comprising experienced staff that appropriately challenge the valuation assumptions made by the front office is an essential prerequisite to the understanding required.

This chapter is the story of the emancipation of the valuation function as a distinct role, its decision-making authority and the people performing this vital role in banks. The question is “did this emancipation

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