FinAnalytica CEO David Merrill Interviewed by Tabb Group's Robert Iati, Partner, Global Head of Consulting.

Fat Tails in Risk Management - May 26, 2010

Extracts from a wide ranging interview with FinAnalytica President Boryana Racheva-Iotova.

Risk Management After the Crisis

In this 4-minute extract, Boryana Racheva-Iotova discusses the changes she has seen at FinAnalytica's customers including:

• Greater responsibilities for risk management
• Greater budgets for risk managers
• Greater time spent on risk analysis

She also discusses why so many risk models failed to predict the crisis and highlights the improvements being made.

Could Risk Models Have Predicted the Crisis?

In this 3 minute extract, Boryana Racheva-Iotova argues that:

• Fat-tailed models could have predicted the crisis
• Fat-tailed risk measures can actually be lower in benign conditions
• Availability of formal training on fat-tailed approaches was very limited until recently.

Despite the fact that the shortcomings of conventional risk models were well understood in the run up to the crisis, few Investors, Asset Managers or Hedge Funds acted to address those issues.

Many believed that implementing a "fat-tailed approach" would put them at a disadvantage to their competitors when in fact a good model adapts depending on the likelihood of extreme events.

Challenges Implementing Fat-tailed Models

Despite their benefits, we understand just how hard it is to effectively implement a a fat-tailed risk approach in practice. FinAnalytica has now invested 20 years of research and 10 years of development in the field. Have a look at this 4 minute video where Boryana Racheva-Iotova, President of the firm, talks about they have overcome the challenge of getting the model to work well in both normal and extreme environments.