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Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown

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Professional Standards

Financial risk management actually is a quantitative field with specific techniques and professional standards. Not everyone does it the same way, and some prominent practitioners even reject certain standard approaches in favor of alternatives. The point is they know the usual way to do things and have the ability to conform, but choose to do something different, either because it's better tailored to their institution or for some other reason. Frankly, in most cases I think the deviations make little difference in the end, and are done more to express individuality than to improve the process, but I don't insist on that view.

For example, almost all financial risk managers use value at risk (VaR) as a primary component of their processes, but a vocal minority objects to VaR on several grounds. Even the minority acknowledges the key importance of making regular daily predictions that are rigorously verified against objectively determined outcomes. Some risk managers believe counting trading profits and losses, assuming fixed positions and normal markets, is not the right measure. Others argue that the 5 percent loss point is not the right metric. Another argument is that VaR has been so misinterpreted outside the profession that it's better to scrap it for an untainted number. There are sound reasons for all of these positions, although I have always been a strong VaR proponent myself.

VaR and all the other things I'm going to describe in this chapter are ...

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