To read Nassim Nicholas Taleb, you’d think that the entire world of finance was in thrall to evil Gaussian models and their cousins, like Black Scholes. The occasional howls from quants last year of 15 sigma and worse events would seem to confirm that view.
Yet I have also seem some references here and there of allowances made for fat tails.
Hopefully readers will be as interested as I am in any light informed commentors can shed on this topic.
In particular, I am curious as to:
To what extent is allowance made on trading desks and at quant hedge funds for extreme event risk? How is it made? Is it via adjustments to Gaussian risk management models, use of other risk management techniques, or less formal (model based) considerations? What role does VaR play versus other approaches? How prevalent are improved versions of VaR, or is that an oxymoron?
How up to speed (at bigger banks) is senior management? Do they get the more granular/risk savvy management information reports, or seriously dumbed down versions?
Is there any sign that financial regulators are moving beyond VaR and leverage ratios as their main risk assessment approaches (no, those stress tests do not count)?
How much (if at all) are institutional salesmen aware of the risks embedded in more complex products (or is this moot since that sort of stuff isn’t trading much)?
Ex quant hedge funds, has there been any marked change in risk management approaches on the buy side? If so, where (what types of players) and what new measures?
That’s a long list, and I would imagine that even informed readers would see only a piece of the equation, but I wanted to be specific so as to avoid people talking past each other (as in not agreeing because they were addressing different aspects of current practice).
Also, does anyone know to what extent CFA training addresses this issue (besides giving it lip service)?