Thursday, September 17, 2009

New Risk Models for Wall Street

The race is on to make newer and better Quant models that factor in the human behavior and psychology.

The existing risk models factored in the default risk of counterparties and the financial instruments. They surely did not factor in the market hysteria / panic and the human behavioral aspect into the models. Generally at the time of such panic, the markets as people may be madly rushing in to sell off the stock or even just freeze and hold back on all transactions. This leads to the newly coined type of risk - "Liquidity Risk".

Financial Markets are being looked at as being similar to Online Communities or Social Networks in terms of a group or collective behavior. So the Risk models are being opened up to allow for more variables and factors affecting it. Researchers at Cornell, MIT, etc., are working on newer risk models using these ideas.

Read the full article on the NYTimes website here.

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