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Examination of VaR after long term capital management


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  • Yalincak, Hakan
  • Li, Yu
  • Tong, Mike
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    The 1998 failure of Long-Term Capital Management (‘LTCM’), a very large and prominent Greenwich, Connecticut based hedge fund, is said to have nearly brought down the world financial system. Over the years, few financial debacles such as LTCM, have been so often written about or discussed without a firm conclusion on what went wrong. What brought the “genius” managers of LTCM to their knees? Was it hubris, or was it something more? Various commentators have jumped on LTCM’s significant leverage ratio or engaged in second-guessing of management’s decision in 1997 to return $2.7 billion of investor capital to increase leverage, and thereby, returns. Others have faulted the lack of transparency at LTCM or faulted regulators for a lack of oversight, criticized regulators for arranging the bailout, while others still have pinpointed the debacle on the failure of LTCM’s risk management prowess. This paper avoids the blame and identifies the multiple factors, both management risk management blunders, as well as inherent flaws in the risk metric used by LTCM – Value at Risk (VaR) – a commonly used risk metric in the financial industry today.

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    Bibliographic Info

    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40152.

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    Date of creation: 02 May 2005
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    Handle: RePEc:pra:mprapa:40152

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    Related research

    Keywords: Hakan Yalincak; Mike Tong; Yu Li; New York University; Value At Risk; Long Term Capital Management; Volatility; Swap Spreads; Convergence Arbitrage;

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    1. Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 36, pages 394.
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