Pandora's Risk by Kent Osband
Author:Kent Osband
Language: eng
Format: epub
Tags: Business and Economics/General
Publisher: Columbia University Press
Published: 2011-08-29T00:00:00+00:00
âI feel sorry for the American cigarette companies,â said Prometheus. âThey got in so much trouble over exaggerated claims for filters. They should have introduced a Cancer-at-Risk standard. It would explain the worst cancer the healthiest 95% of smokers would develop in two years.â
âThat wouldnât have saved them,â said Pandora. âThe standards for peddling tobacco are much stricter than the standards for peddling financial carcinogens. In finance, let the sucker beware. Besides, you overlook the power of the name.â
âA rose by any other name would smell as sweet.â¦â
âThatâs because a rose is directly material. Value is a perception.â
âMarkets make value material, by trading money for real goods and services.â
âBy that criterion VaR isnât even value. Itâs a threshold. Have financial institutions issue puts to cover the losses beyond their VaR. Now there would be value. But it could deviate a lot from the VaR.â
âIf VaR is such rubbish, why not ban its use?â asked Prometheus. âOr make users post big health warnings, like âVaR is hazardous to your financial health.â â
Pandora smiled. âI like the health warning idea. But I fear it would get tucked into the long disclaimers that lawyers write to each other. Besides, every estimate of risk can be converted into a VaR measure given some auxiliary assumptions. Thereâs nothing wrong with that.â
âPeople think empirical VaR is better, because it doesnât need conversion.â
âThatâs another big misconception. The only thing empirical VaR is great at predicting is itself. Most days it doesnât change at all.â
âI like Osbandâs approach. Pick a measure of observed tail risk, set up a market contest to predict it, and use the market-clearing consensus as the predictor. But Iâm not that impressed with the measures he uses. He would do much better looking at trading ranges.â
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