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January 26, 2009

Categorized as misleading at best

Here, too, there is reason for optimism. Wall Street has been asking itself: Were its financial models fundamentally flawed, or did flawed financial professionals misuse the models? Take the example of the metric that banks use to manage their risk, or so they thought. Value at Risk calculations were developed in the early 1990s at J.P. Morgan to measure the different kinds of financial risk using a single measure. Banks analyzed historical data to understand the relative riskiness of a $50 million investment in three-year Treasurys versus 30-year Treasurys, or even a $50 million investment in Japanese yen versus 1,000 barrels of oil.

By my reading, this implies that JP Morgan was the first on Wall Street to use the Value at Risk mythology. They were not. Bankers Trust definitely did it earlier. In fact, much of the experienced people in risk management working on wall street either worked in risk management at Bankers Trust or trained under someone who did. In fact, as far as I could tell from a quick check of jstor, it seems that first the financial professionals developed VaR and then about 10 years later academics started writing about it in the late 1990's.

Posted by OneEyedMan at January 26, 2009 7:30 AM

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