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Strategies & Market Trends : The Thread Formerly Known as No Rest For The Wicked -- Ignore unavailable to you. Want to Upgrade?

To: kathyh who wrote (65822)	10/14/1999 8:21:00 PM
From: Paul A	Respond to of 90042

VERY cool.. Thanks Kath!

To: kathyh who wrote (65822)	10/14/1999 8:28:00 PM
From: stan s.	Read Replies (2) \| Respond to of 90042

Here's the speech on the wires. This is essentially the same, or at least very similar, as the one discussed on this thread several weeks ago...given at a luncheon or report to congress...anybody else recall? Perhaps it's the table pounding aspect... TEXT-Greenspan speech on measuring risk We can readily describe this process, but, to date, economists have been unable to anticipate sharp reversals in confidence. Collapsing confidence is generally described as a bursting bubble, an event incontrovertibly evident only in retrospect. To anticipate a bubble about to burst requires the forecast of a plunge in the prices of assets previously set by the judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific investments that make up our broad price indexes of stocks and other assets. Nevertheless, if episodic recurrences of ruptured confidence are integral to the way our economy and our financial markets work now and in the future, the implications for risk measurement and risk management are significant. Probability distributions estimated largely, or exclusively, over cycles that do not include periods of panic will underestimate the likelihood of extreme price movements because they fail to capture a secondary peak at the extreme negative tail that reflects the probability of occurrence of a panic. Furthermore, joint distributions estimated over periods that do not include panics will underestimate correlations between asset returns during panics. Under these circumstances, fear and disengagement on the part of investors holding net long positions often lead to simultaneous declines in the values of private obligations, as investors no longer realistically differentiate among degrees of risk and liquidity, and to increases in the values of riskless government securities. Consequently, the benefits of portfolio diversification will tend to be overestimated when the rare panic periods are not taken into account. The uncertainties inherent in valuations of assets and the potential for abrupt changes in perceptions of those uncertainties clearly must be adjudged by risk managers at banks and other financial intermediaries. At a minimum, risk managers need to stress test the assumptions underlying their models and set aside somewhat higher contingency resources -- reserves or capital -- to cover the losses that will inevitably emerge from time to time when investors suffer a loss of confidence. These reserves will appear almost all the time to be a suboptimal use of capital. So do fire insurance premiums. More important, boards of directors, senior managers, and supervisory authorities need to balance emphasis on risk models that essentially have only dimly perceived sampling characteristics with emphasis on the skills, experience, and judgment of the people who have to apply those models. Being able to judge which structural model best describes the forces driving asset pricing in any particular period is itself priceless. To paraphrase my former colleague Jerry Corrigan, the advent of sophisticated risk models has not made people with grey hair, or none, wholly obsolete.