Measuring and managing risk in innovative financial instruments

This paper discusses the difficult challenges of measuring and managing the risk of innovative financial products. Measuring risk requires the ability to first identify the different dimensions of risk that an innovation introduces. The list of possible factors is long: model restrictions, illiquidi...

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Bibliographic Details
Published in:Journal of credit risk 2009-07, Vol.5 (2), p.87-114
Main Author: Turnbull, Stuart
Format: Article
Language:English
Subjects:
Collateral
Collateralized debt obligations
Credit default swaps
Credit risk
Derivatives
Financial instruments
Hedging
Innovations
Prices
Pricing policies
Risk assessment
Studies
Valuation
Volatility
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Summary:This paper discusses the difficult challenges of measuring and managing the risk of innovative financial products. Measuring risk requires the ability to first identify the different dimensions of risk that an innovation introduces. The list of possible factors is long: model restrictions, illiquidity, limited ability to test models, product design, counterparty risk and related managerial issues. In order to measure some of the different dimensions of risk, the implications of limited data availability must be addressed. Given the uncertainty about model valuation, how can risk managers respond? All parties within a company (senior management, traders and risk managers) have important roles to play in assessing, measuring and managing the risk of new products. [PUBLICATION ABSTRACT]
ISSN:1744-6619
1744-6619
DOI:10.21314/jcr.2009.093