ERM frameworks [20]

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Bullet points include: “The illiquidity of markets is probably the greatest challenge to risk controls and the biggest destroyer of model validity. VaR models assume the ability to liquidate any position on demand at the stated valuation. That means risk can be calculated by looking at the daily volatility of prices to create an expectation of what is likely. However, the events of last year showed that to be a flawed approach. Many assets have been stuck, un-saleable at any price; others were on trading books but in effect only marked intermittently. So, daily VaR calculations might have suggested low risk on assets which subsequently collapsed in value. Managing to an inappropriate model is very likely to have led to some very unpleasant surprises in dealing rooms the world over.”

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