Volatility Risk Is Not “Risk”

Drama. Would the banks chase this “model” (please see below) if it could be any of  less profitable, not profitable, or even as likely to produce losses that can’t be controlled as it might be to produce profits that can’t be explained (Reuters, March 18, 2013, JPMorgan and other banks tinker with risk models)? The answer is yes, yes and yes, because what else can they to do in a world that has more “money” or “cash” looking for opportunities than opportunities looking for money?

In fact (in very rough numbers), the world is so awash with “money” trying to become “capital” or, an “investment”, that the banks have “had” to create “synthetic investments” as “new opportunities” in order to try to eke out some real return (above the rate of inflation) on “cash” which they would otherwise just have to store and return to its owners when they need it (please see our Post, Numbers 20:12, August 2012). “Had” is, of course, a strong word because who doesn’t want to “test the boundaries” of what is a plausible tool for estimating “volatility risk” and “diversifying” said risk across negatively correlated assets (please see our Post, Volatility For The Delta Challenged, or Run, Rabbit! Run, June 2012, or any of our numerous Posts on Hedge Funds Bushwhacked By Volatility, most recently, January 2013)?

“Risk-weighted assets used to be done by some department of the bank and no one concentrated on them; they were insignificant,” the European bank source said. “Now, we’re all trying to optimize them.” – ibid, Reuters.

OK, so make my day.

Postscript

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