There has been a lot of talk in the press following the credit crisis, Bear Stearns and Soc Gen about risk management and its role in our industry. Last month saw articles by Alan Greenspan and Nout Wellink talking about the need for banks and regulators to be more "forward-looking"; advocating more use of simulation rather than relying on historical calculation. This sounds ideal but there are some intrinsic issues here.

Although it has taken some time (arguably changes should have happened in 1998 following the collapse of LTCM) the financial world is rightly discussing how the industry should be managing its risks. The problem is however much deeper than changing focus from an historical to a more "forward-looking" approach.

Currently most banks, hedge and institutional funds use VaR as the benchmark analytic for assessing risk exposure. Herein lies the first issue. VaR is based on a normal Gaussian distribution ...   more »