kaal:claim:3405660-007

Conventional risk models understated LTCM's losses because the models were estimated during more stable periods and therefore did not describe behavior under stress.

Source quote, verbatim

markets greatly exceeded what conventional risk models suggested were probable, but these were estimated during more stable periods.

From

Kaal, Indirect Regulation of Hedge Funds (2019), II. The Need for Hedge Fund Regulation, p. 7
https://ssrn.com/abstract=3405660 · source PDF

Cite as

Kaal, Indirect Regulation of Hedge Funds (2019). SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3405660

Holds when

models calibrated on data from stable market periods
subsequent stress conditions

Classification

failuresupport: evidencedfailure: risk model calibration failurefamily: measurement-and-metric-failurerisk-and-incentives

Verify

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