Anticipating and Mitigating Catastrophic Risk

Recent market turmoil has put risk management firmly in the spotlight, with regulators, lawmakers, industry practitioners, senior management, and the press all scrutinizing current risk management practices. Standard measures such as value at risk (VaR), sensitivity analysis, and historically based stress tests have formed the backbone of risk management for a number of years, but have fallen short in terms of rigorously analysing the extreme events that have swept through the global marketplace.

This market perspective introduces a new risk calculation that complements existing methodologies. Specifically, it addresses the potentially devastating effects on the overall value of a firm’s positions following unforeseeable and extreme movements in key risk factors.