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Having worked in the finance industry developing risk models for clearing houses, I can safely say that the problem is a lot worse than the authors make it out

Having worked in the finance industry developing risk models for clearing houses, I can safely say that the problem is a lot worse than the authors make it out to be. Regulators across the globe, practically all of whom are wholly ignorant of what they regulate, demand implementations of their tabular formulas which are often highly specific rather than generalized and so become obsolete as quickly as people find gray spots in the formulations and ways to circumvent the intentions of the regulation. Basic it reads more like law than math and it doesn’t work. That means all costs go to implementing these sub-par models leaving no room for innovation. In the end, common people will have to foot the bill and regulations will get even worse. Vicious cycle.

floki999 7y ago
Agree about the regulators’ (lack of) abilities. Catastrophe risk models, however, shouldn’t be be lumped together with the types of financial engineering/quant models used in capital markets. The latter are generally very theoretical, based on pretty shallow theory and little data. Academia has been spewing out a lot of quant finance models which have little bearing on real market dynamics. Cat risk models, however, are generally more data-driven and rich in terms of science and engineering I.e. understanding of underlying hazard mechanisms. But, like any model, they still are only approximations of reality.
ThrustVectoring 7y ago
An additional problem with regulations is that the regulators are often completely blind to activity on the other side of regulatory boundaries. This was a pretty big contributor to the 2008 Financial Crisis - risky loans were sold off of the books of American banks, packaged up as AAA rated securities, and then sold to European banks which were allowed (by formula) extremely high levels of leverage for buying AAA rated debt.

floki999 7y ago

Agree about the regulators’ (lack of) abilities. Catastrophe risk models, however, shouldn’t be be lumped together with the types of financial engineering/quant models used in capital markets. The latter are generally very theoretical, based on pretty shallow theory and little data. Academia has been spewing out a lot of quant finance models which have little bearing on real market dynamics. Cat risk models, however, are generally more data-driven and rich in terms of science and engineering I.e. understanding of underlying hazard mechanisms. But, like any model, they still are only approximations of reality.

ThrustVectoring 7y ago

An additional problem with regulations is that the regulators are often completely blind to activity on the other side of regulatory boundaries. This was a pretty big contributor to the 2008 Financial Crisis - risky loans were sold off of the books of American banks, packaged up as AAA rated securities, and then sold to European banks which were allowed (by formula) extremely high levels of leverage for buying AAA rated debt.