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dead?
Maarten
Gelderman
Responses to the
crisis
Is risk modelling dead? Reform by nostalgia
Lessons for us
or Modelling
How to evaluate model
Wrap-up
Maarten Gelderman
Responses to the
crisis
Reform by nostalgia
Lessons for us
Modelling
How to evaluate model
shortcomings?
Our job is to kill the black swan. Why the crisis was not a
black swan
The Engle experiment
Responses to the
I No large banks crisis
Reform by nostalgia
I No financial conglomerates Lessons for us
Modelling
I Retreat to national boundaries How to evaluate model
shortcomings?
I No proprietary trading Why the crisis was not a
black swan
The Engle experiment
I No complex products
Wrap-up
I No models
I No performance-related pay
I A leverage ratio
Although not all outcomes of such an approach are
undesirable, we risk ignoring the fact that the world has
changed and there effectively is no way back to the “good
old times”.
Lessons for us Is risk modelling
dead?
Maarten
Gelderman
Responses to the
crisis
Reform by nostalgia
Lessons for us
Modelling
How to evaluate model
shortcomings?
I Society wants more control Why the crisis was not a
black swan
Wrap-up
I It doesn’t help to deny model failures (“25σ”)
I Models are not reality
How to evaluate model shortcomings? Is risk modelling
dead?
Maarten
Gelderman
Responses to the
I Simplifications are only acceptable if they avoid crisis
Reform by nostalgia
Modelling
I Simplifications are not acceptable if they give the How to evaluate model
Responses to the
crisis
Reform by nostalgia
Lessons for us
Modelling
How to evaluate model
shortcomings?
I Long-term perspective Why the crisis was not a
black swan
Wrap-up
I What is a realistic number of outliers (the Engle
experiment)
0,000
0,005
0,010
0,015
0,020
0,025
0,030
0,035
0,040
08-02-1994
09-05-1994
05-08-1994
03-11-1994
01-02-1995
02-05-1995
31-07-1995
27-10-1995
25-01-1996
24-04-1996
23-07-1996
21-10-1996
17-01-1997
17-04-1997
16-07-1997
14-10-1997
12-01-1998
10-04-1998
09-07-1998
07-10-1998
05-01-1999
05-04-1999
02-07-1999
30-09-1999
29-12-1999
Volatility of returns
28-03-2000
26-06-2000
sd MSCI
22-09-2000
21-12-2000
21-03-2001
19-06-2001
17-09-2001
sd UKP/USD
14-12-2001
14-03-2002
12-06-2002
10-09-2002
09-12-2002
sd EUR/USD
07-03-2003
05-06-2003
03-09-2003
02-12-2003
01-03-2004
28-05-2004
26-08-2004
24-11-2004
22-02-2005
23-05-2005
19-08-2005
17-11-2005
15-02-2006
16-05-2006
14-08-2006
10-11-2006
08-02-2007
09-05-2007
07-08-2007
05-11-2007
01-02-2008
01-05-2008
30-07-2008
28-10-2008
26-01-2009
24-04-2009
crisis
black swan
Wrap-up
Lessons for us
Modelling
shortcomings?
dead?
Maarten
Reform by nostalgia
Gelderman
sd MSCI
14-10-1997
12-01-1998
10-04-1998
09-07-1998
07-10-1998
sd UKP/USD
05-01-1999
05-04-1999
02-07-1999
30-09-1999
29-12-1999
28-03-2000
sd EUR/USD
26-06-2000
22-09-2000
21-12-2000
21-03-2001
19-06-2001
17-09-2001
14-12-2001
corr MSCI-USD/EUR
14-03-2002
12-06-2002
10-09-2002
09-12-2002
07-03-2003
05-06-2003
03-09-2003
corr UKP-USD/EUR
02-12-2003
01-03-2004
28-05-2004
26-08-2004
24-11-2004
22-02-2005
23-05-2005
19-08-2005
17-11-2005
15-02-2006
Volatility and correlation of returns
16-05-2006
14-08-2006
10-11-2006
08-02-2007
09-05-2007
07-08-2007
05-11-2007
01-02-2008
01-05-2008
30-07-2008
28-10-2008
26-01-2009
24-04-2009
0
1
-1
0,2
0,4
0,6
0,8
-0,8
-0,6
-0,4
-0,2
crisis
black swan
Wrap-up
Lessons for us
Modelling
shortcomings?
dead?
Maarten
Reform by nostalgia
Gelderman
-0.8
-0.6
-0.4
-0.2
0.2
0.4
0.6
0.8
13/07/77
26/01/78
10/08/78
23/02/79
07/09/79
21/03/80
03/10/80
21/04/81
02/11/81
18/05/82
30/11/82
14/06/83
27/12/83
11/07/84
23/01/85
07/08/85
21/02/86
05/09/86
20/03/87
02/10/87
18/04/88
28/10/88
15/05/89
27/11/89
12/06/90
24/12/90
10/07/91
22/01/92
05/08/92
18/02/93
SD S&P 500
01/09/93
16/03/94
29/09/94
13/04/95
Quick and Dirty
26/10/95
S&P-30YR
S&P 500, 30YR T
10/05/96
21/11/96
09/06/97
19/12/97
08/07/98
21/01/99
05/08/99
17/02/00
31/08/00
19/03/01
05/10/01
23/04/02
04/11/02
21/05/03
03/12/03
Volatility and correlation of returns
21/06/04
03/01/05
19/07/05
01/02/06
16/08/06
05/03/07
17/09/07
02/04/08
14/10/08
30/04/09
0
0.01
0.01
0.02
0.02
0.03
0.03
0.04
0.04
0.05
0.05
crisis
black swan
Wrap-up
Lessons for us
Modelling
shortcomings?
dead?
Maarten
Reform by nostalgia
Gelderman
Responses to the
crisis
Reform by nostalgia
Lessons for us
Modelling
I Don’t ignore older data How to evaluate model
shortcomings?
Why the crisis was not a
I Model volatility black swan
The Engle experiment
Responses to the
crisis
Reform by nostalgia
Lessons for us
Modelling
How to evaluate model
shortcomings?
Why the crisis was not a
I 2004 models black swan
The Engle experiment
Responses to the
crisis
Reform by nostalgia
Lessons for us
Modelling
How to evaluate model
shortcomings?
Why the crisis was not a
black swan
The Engle experiment
Wrap-up
Is risk modelling
Using GARCH , DCC and extensions dead?
Maarten
High Low Book to Market (Engle 2009) Gelderman
Responses to the
crisis
Reform by nostalgia
Lessons for us
Modelling
How to evaluate model
shortcomings?
Why the crisis was not a
black swan
The Engle experiment
Wrap-up
Evalutation Is risk modelling
dead?
Maarten
Gelderman
Responses to the
crisis
Reform by nostalgia
Lessons for us
Modelling
How to evaluate model
shortcomings?
I Models gave the wrong incentives Why the crisis was not a
black swan
Wrap-up
I Models were abused
I Better models were available
Wrap-up: how to kill a black swan? Is risk modelling
dead?
Maarten
Gelderman
Responses to the
crisis
Reform by nostalgia
Lessons for us
Modelling
I Be more humble and honest How to evaluate model
shortcomings?
Why the crisis was not a
Responses to the
crisis
Reform by nostalgia
Lessons for us
Modelling
How to evaluate model
shortcomings?
Wrap-up
Speech at the Peterson Institute for International
Economics, June 2009.