Introduction, by Way of Retraction

Just after I posted my last blog questioning a recent Investopedia column in the San Francisco Chronicle, I had a congenial note from the author of that column, David Harper.  His column compared Monte Carlo Simulation with two other methods of calculating Value-at-Risk, and I was concerned that its view of risk and risk analysis techniques was overly simplified. David   was surprised to discover that column had just appeared because he wrote it five years ago!

The five-year lag explains a lot–Monte Carlo simulation was not nearly so widely adopted or carried about by so many software tools as it is today–and I should have suspected the article was a vintage piece before I started carping.

So I happily retract my concerns to introduce to you David Harper, CPA and certified Financial Risk Manager.  In response to my comment about the attitudes and techniques that led to last year’s collapse of the financial markets, David says that, now that the black swan has flown, "the crisis should implicate both HistoricalSim VaR and parametric VaR (at least multivariate normal!) and point toward Monte Carlo Sim. I’ve been thinking for a while that all of this [I think he means lack of accuracy in specifying risk] should really boost Monte Carlo."

Investment commentary is only one of David’s activities.  He is the founder of Bionic Turtle, a business devoted to e-learning about financial risk and preparation for the certification exam for financial risk managers. This is a worthy enterprise–I was relieved to discover that there are hoops financial risk managers have to got through to be called that–and for anyone who would like to know more about quantitative techniques for risk analysis, its website is worth prowling. 

Thank you, David, for setting me straight.  

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1 Comment

  1. Hi Holly!

    Thanks for your kind words. I just wanted to mention, for those wanting to learn more about VaR, we have a (free!) VaR playlist at our youtube partner channel @ (playlists on the right).

    It’s true what you say, there is a risk certification. The other great one is PRM (professional risk manager by PRMIA).

    The uptake in MCS is interesting … in my experience, pre-crisis most banks/firms for VaR used either historical simluation (for banks, surveys say 2/3rds or more) or covariance/variance analytical VaR. But you’ve seen the "loss of faith" re these methods. I think Nassim Taleb’s critique is especially devastating: he’s basically saying you cannot quantify (parameterize) the extreme tails. Tweaks can be applied to these two methods but in the meantime, I think MCS (and scenario imagining for that matter) are well-positioned. Cheers, David

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