Flawed risk modelling has been blamed for the failure to predict the occurence and intensity of the global financial crisis that took hold early last year and reached its peak one year ago.
In this intriguing New York Times article by Steve Lohr published 12 September, over reliance on computerised risk models that emphasise "efficient market" dynamics can cause real problems in determining the likelihood of catastrophic events, since they do not incorporate other critical variables including the human response to crisis and loss of confidence.
The article quotes an approach by Andrew Lo at the Massachusetts Institute of Technology who argues that an understanding of liquidity risk requires a new perspective based on the "adaptive-market hypotheseis" which does not assume that markets, and their participants, behave as rationally as is assumed in the efficient market model.
To what degree is this true - and what implications might these improved models of liquidity risk also provide a blueprint for risk modelling in BCM? The future will tell.
http://www.nytimes.com/2009/09/13/business/13unboxed.html
