Sungard's Marcus Cree looks at similarities between the story of VaR and Star Wars and how an imperfect risk model is still the only one around.
In recent months, there has been an interesting twist in the
story of VaR, the central measure of market risk, capital
requirements, and one of the targets of criticism in the
aftermath of the credit crisis.
Not much comment has been made of it, but VaR has been
adopted as a key plank in the central clearing of derivatives,
precisely because of its ability to produce a meaningful single
number. This is ironic given that it was this single number,
and its attendant lack of insight into the deeper tailed risks,
that led to much debate about VaR’s suitability as
the key metric, and the role it played in risk management
leading to the crisis.
And coincidentally, it seems the story of VaR is paralleled
well by the journey of young Anakin Skywalker in George
Lucas’s prescient epic Star Wars.
To fully appreciate the turnaround, it’s worth
looking briefly at the origin of Value-at-Risk.
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