Description
Is the growth of modern financial risk management a result of the accuracy and reliability
of risk models? This paper argues that the remarkable success of today’s financial risk management
methods should be attributed primarily to their communicative and organizational
usefulness and less to the accuracy of the results they produced. This paper traces
the intertwined historical paths of financial risk management and financial derivatives
markets. Spanning from the late 1960s to the early 1990s, the paper analyses the social,
political and organizational factors that underpinned the exponential success of one of
today’s leading risk management methodologies, the applications based on the Black–
Scholes–Merton options pricing model. Using primary documents and interviews, the
paper shows how financial risk management became part of central market practices
and gained reputation among the different organisational market participants (trading
firms, the options clearinghouse and the securities regulator). Ultimately, the events in
the aftermath of the market crash of October 1987 showed that the practical usefulness
of financial risk management methods overshadowed the fact that
doc_434295639.pdf
Is the growth of modern financial risk management a result of the accuracy and reliability
of risk models? This paper argues that the remarkable success of today’s financial risk management
methods should be attributed primarily to their communicative and organizational
usefulness and less to the accuracy of the results they produced. This paper traces
the intertwined historical paths of financial risk management and financial derivatives
markets. Spanning from the late 1960s to the early 1990s, the paper analyses the social,
political and organizational factors that underpinned the exponential success of one of
today’s leading risk management methodologies, the applications based on the Black–
Scholes–Merton options pricing model. Using primary documents and interviews, the
paper shows how financial risk management became part of central market practices
and gained reputation among the different organisational market participants (trading
firms, the options clearinghouse and the securities regulator). Ultimately, the events in
the aftermath of the market crash of October 1987 showed that the practical usefulness
of financial risk management methods overshadowed the fact that
doc_434295639.pdf