VaR Datapoint of the Day

Morgan Stanley has some of the most sophisticated risk-management systems on

planet earth. And

yet, somehow,

The company disclosed today that daily trading losses during the quarter

exceeded the firm’s trading value-at- risk calculation on six days during

the quarter.

Needless to say, this is something which is not meant to happen. "Value

at risk" means, basically, the amount of money you could conceivably lose

in one day. To lose more than that in a day is a sign that your models might

well be broken. To lose more than that six days in one quarter is a

sign of utter cluelessness.

Update: jck

has the rather misleading graphic,

from Morgan Stanley’s Q3. It shows four trading days with more than $125 million

in losses, and three days with losses of somewhere between $50 million and $125

million, which means that Morgan Stanley’s VaR was probably somewhere around

$75 million or so.

What it doesn’t show is just how skewed the distribution really is: on its

worst day, Morgan Stanley lost $390 million. Which is more than four times

its VaR. Fat tail, much?

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