Self-referential risk

Richard Libby, chief credit officer at Barclays Global Investors, has made an interesting observation about model risk.¹ He argues it is not poor models that present the most serious dangers. To be sure, overreliance on the sometimes spurious robustness of certain models can cause painful losses for some market participants. This occurred in 2005 when the market standard Gaussian copula model for valuing collateralised debt obligations was used as the basis for attempting to hedge tranches of