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No Crystal Ball For Predicting Risk (Int'l Edition)


International -- Readers Report

NO CRYSTAL BALL FOR PREDICTING RISK (int'l edition)

"Taking the angst out of taking a gamble" (Finance, July 21) was timely. But the value-at-risk (VAR) technology is less reliable than some academic proponents would like us to believe. The actual probability of a specified loss can vary by as much as one order of magnitude (10 times) from the probability estimated by value-at-risk methods.

The article suggests that a bank might notify the Federal Reserve that "we estimate that there is a 5% chance our portfolio will decline $20 million or more in the next two days." In fact, given the properties of the value-at-risk historical estimation method, that reported 5% may be as little as 0% or as large as 20%. The seeming precision of VAR estimates is deceptive. Having worked both sides of the street, I find that communication between financial rocket scientists and working risk managers is sometimes dangerously incomplete. The unreliability of value-at-risk estimates has not to my knowledge been adequately communicated to regulators or risk managers.

Richard B. Hoppe

Gambier, OhioReturn to top

INDUSTRIAL ESPIONAGE IS A TWO-WAY STREET (int'l edition)

It is well known that the spy agencies of many countries have launched industrial operations against "friendly" countries ("Corporate spies feel a sting," U.S. Government, July 14). This is one of their most important fields. What friendly countries such as Israel, France, and Taiwan are doing in the U.S. is the same thing American agents are doing in Europe.

Juan Carlos Caro

DresdenReturn to top


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