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A blog on financial markets and their regulation
I wrote a chapter on risk management lessons from the global financial crisis for derivative exchanges for a book edited by Robert W. Kolb on Lessons from the Financial Crisis: Causes, Consequences, and Our Economic Future.
During the global financial crisis, no major derivative clearinghouse in the world encountered distress, while many banks were pushed to the brink and beyond. This was despite the exchanges having to deal with more volatile assets—equities are about twice as volatile as real estate, and natural gas is about 10 times more volatile than real estate. Clearly, risk management at the world’s leading exchanges proved to be superior to that of the banks. The global financial crisis has shown that the quality of risk management models does matter.
Three important lessons have emerged from this experience:
Most of the chapter paper deals with these lessons from the crisis of 2007-2009. In the final section, the paper argues that as derivative exchanges prepare to trade and clear ever more complex products, it is important that they refine and develop their risk models even further so that they can survive the next crisis.
The chapter is based largely on a paper that I wrote in February 2009.