Jon Danielsson, 12 December 2018

Jon Danielsson, 18 January 2015

The Swiss central bank last week abandoned its euro exchange rate ceiling. This column argues that the fallout from the decision demonstrates the inherent weaknesses of the regulator-approved standard risk models used in financial institutions. These models under-forecast risk before the announcement and over-forecast risk after the announcement, getting it wrong in all states of the world.

Jon Danielsson, 06 March 2013

Is the fact that different banks have different risk models problematic? Contrary to the Basel Committee and the European Banking Authority, this column argues that heterogeneity is a good thing. It leads to countercyclicality, and thereby reduces instances of procyclical price movements. Both the Basel Committee and the European Banking Authority have indicated that they are troubled by heterogeneity and are seeking to rectify the problem. Their conclusion is plainly wrong.

Jon Danielsson, 08 May 2008

In response to financial turmoil, supervisors are demanding more risk calculations. But model-driven mispricing produced the crisis, and risk models don’t perform during crisis conditions. The belief that a really complicated statistical model must be right is merely foolish sophistication.

Avinash Persaud, 04 April 2008

Financial supervision arguably failed to prevent today’s turmoil because it relied upon the very price-sensitive risk models that produced the crisis. This column calls for an ambitious departure from trends in modern financial regulation to correct the problem.

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