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Failures in risk management

  • Ralph C. Kimball

Risk management has received increasing attention in recent years, both from academics and from practitioners. The heightened interest is the result of a number of coincident secular trends, including increased investment in volatile emerging markets and the growing role of capital markets in both developed and emerging economies, as well as the introduction of volatile financial innovations. Risk management has also attracted attention as a result of the repeated and well-publicized failures associated with its implementation. Despite the increased attention paid to risk management, frequent instances still occur when sophisticated investors or firms experience sudden, unexpected, and devastating losses. ; This article discusses failures in risk management, why they occur, and what can be done to reduce their occurrence. The author discusses the nature of risk and the objectives of risk management. He argues that intuitively attractive conceptual simplifications often create significant errors in risk measurement. He describes such failures in risk management and goes on to discuss the implications, both for managers and for regulators.

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Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

Volume (Year): (2000)
Issue (Month): Jan ()
Pages: 3-12

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Handle: RePEc:fip:fedbne:y:2000:i:jan:p:3-12
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  1. Christopher L. Culp & Merton H. Miller, 1995. "Metallgesellschaft And The Economics Of Synthetic Storage," Journal of Applied Corporate Finance, Morgan Stanley, vol. 7(4), pages 62-76.
  2. Antonio S. Mello & John E. Parsons, 1995. "Maturity Structure Of A Hedge Matters: Lessons From The Metallgesellschaft Debacle," Journal of Applied Corporate Finance, Morgan Stanley, vol. 8(1), pages 106-121.
  3. René M. Stulz, 1996. "Rethinking Risk Management," Journal of Applied Corporate Finance, Morgan Stanley, vol. 9(3), pages 8-25.
  4. Tufano, Peter, 1996. " Who Manages Risk? An Empirical Examination of Risk Management Practices in the Gold Mining Industry," Journal of Finance, American Finance Association, vol. 51(4), pages 1097-1137, September.
  5. Peter Fortune, 1999. "Are stock returns different over weekends? a jump diffusion analysis of the "weekend effect"," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 3-19.
  6. Katerina Simons, 1997. "Model error," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 17-28.
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