“The essential problem,” he wrote, “is that our models — both risk models and econometric models — as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality.”
Says Professor Paul Glasserman: “Mr. Greenspan’s article highlights the shortcomings in risk-management systems that result from limited historical data — particularly data from good economic times. Taking this point a step further, financial innovation can end up focusing — sometimes unwittingly — on the weak points in risk measurement. When correlations are misjudged, as in Greenspan’s example, the greatest strains get put on the weakest links.”
Photo credit: Toni Lozano
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