Christopher Smith

Comparing Value-at-Risk to Crash-and-Burn

The problem is that saying you're measuring "risk" based on "normal market conditions" is circular reasoning. The major risk rears its head when multiple things go wrong simultaneously, and given the number of different things that can go wrong, it'll inevitably happen.

Those are precisely the times when LTCM or the CDO market rolls over and dies, and simply assuming those situations out of your model means that your model is inadequate for the specific job it's supposed to do.