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The Known, the Unknown, and the Unknowable in Financial Risk Management: Measurement and Theory Advancing Practice

Author

Listed:
  • Francis X. Diebold
  • Neil A. Doherty
  • Richard J. Herring

Abstract

A clear understanding of what we know, don't know, and can't know should guide any reasonable approach to managing financial risk, yet the most widely used measure in finance today--Value at Risk, or VaR--reduces these risks to a single number, creating a false sense of security among risk managers, executives, and regulators. This book introduces a more realistic and holistic framework called KuU --the K nown, the u nknown, and the U nknowable--that enables one to conceptualize the different kinds of financial risks and design effective strategies for managing them. Bringing together contributions by leaders in finance and economics, this book pushes toward robustifying policies, portfolios, contracts, and organizations to a wide variety of KuU risks. Along the way, the strengths and limitations of "quantitative" risk management are revealed. In addition to the editors, the contributors are Ashok Bardhan, Dan Borge, Charles N. Bralver, Riccardo Colacito, Robert H. Edelstein, Robert F. Engle, Charles A. E. Goodhart, Clive W. J. Granger, Paul R. Kleindorfer, Donald L. Kohn, Howard Kunreuther, Andrew Kuritzkes, Robert H. Litzenberger, Benoit B. Mandelbrot, David M. Modest, Alex Muermann, Mark V. Pauly, Til Schuermann, Kenneth E. Scott, Nassim Nicholas Taleb, and Richard J. Zeckhauser.

Suggested Citation

  • Francis X. Diebold & Neil A. Doherty & Richard J. Herring, 2010. "The Known, the Unknown, and the Unknowable in Financial Risk Management: Measurement and Theory Advancing Practice," Economics Books, Princeton University Press, edition 1, number 9223.
    • Handle: RePEc:pup:pbooks:9223
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    Citations

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    Cited by:

    1. Michal Skorepa & Jakub Seidler, 2015. "Capital buffers based on banks’ domestic systemic importance: selected issues," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 7(3), pages 207-220, August.
    2. Yuanrong Wang & Yinsen Miao & Alexander CY Wong & Nikita P Granger & Christian Michler, 2023. "Domain-adapted Learning and Interpretability: DRL for Gas Trading," Papers 2301.08359, arXiv.org, revised Sep 2023.
    3. Michal Skorepa, 2014. "Concurrent Capital Buffers in a Banking Group," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2013/2014, chapter 0, pages 128-136, Czech National Bank.
    4. Christian Hugo Hoffmann, 2017. "Towards Understanding Dynamic Complexity in Financial Systems Structure-based Explanatory Modelling of Risks," Systems Research and Behavioral Science, Wiley Blackwell, vol. 34(6), pages 728-745, November.
    5. Ross Brown & Ronald V Kalafsky & Suzanne Mawson & Lori Davies, 2020. "Shocks, uncertainty and regional resilience: The case of Brexit and Scottish SMEs," Local Economy, London South Bank University, vol. 35(7), pages 655-675, November.
    6. W. Kip Viscusi & Richard J. Zeckhauser, 2015. "Regulating Ambiguous Risks: The Less than Rational Regulation of Pharmaceuticals," The Journal of Legal Studies, University of Chicago Press, vol. 44(S2), pages 387-422.
    7. Gabel Taggart, 2023. "Taking stock of systems for organizing existential and global catastrophic risks: Implications for policy," Global Policy, London School of Economics and Political Science, vol. 14(3), pages 489-499, June.
    8. Stéphane Albert & Hervé Alexandre, 2018. "Banks’ earnings: Empirical evidence of the influence of economic and financial market factors," Review of Financial Economics, John Wiley & Sons, vol. 36(2), pages 97-116, April.
    9. Michael Hanemann, 2010. "The Impact of Climate Change: An Economic Perspective," Chapters, in: Emilio Cerdá Tena & Xavier Labandeira (ed.), Climate Change Policies, chapter 2, Edward Elgar Publishing.
    10. Gordon L Clark, 2012. "Pensions or Property?," Environment and Planning A, , vol. 44(5), pages 1185-1199, May.
    11. Jingnan Chen & Mark D. Flood & Richard B. Sowers, 2015. "Measuring the Unmeasurable: An Application of Uncertainty Quantification to Financial Portfolios," Working Papers 15-19, Office of Financial Research, US Department of the Treasury.
    12. Ekaterina Svetlova & Henk van Elst, 2012. "How is non-knowledge represented in economic theory?," Papers 1209.2204, arXiv.org.
    13. Gordon L. Clark, 2014. "Information, knowledge, and investing in offshore financial markets," Journal of Sustainable Finance & Investment, Taylor & Francis Journals, vol. 4(4), pages 299-320, October.
    14. Oksana Hoshovska & Zhanna Poplavska & Jana Kajanova & Olena Trevoho, 2023. "Random Risk Factors Influencing Cash Flows: Modifying RADR," Mathematics, MDPI, vol. 11(2), pages 1-22, January.
    15. Chuliá, Helena & Guillén, Montserrat & Uribe, Jorge M., 2017. "Measuring uncertainty in the stock market," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 18-33.
    16. Albert, Stéphane, 2015. "US bank holding companies: Structure of activities and performance through the cycles," International Review of Financial Analysis, Elsevier, vol. 42(C), pages 253-269.
    17. Michal Skorepa & Jakub Seidler, 2013. "An Additional capital requirements based on the domestic systemic importance of a bank," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2012/2013, chapter 0, pages 96-102, Czech National Bank.
    18. Jaime Terceiro Lomba, 2019. "The energy transition and the financial system," Financial Stability Review, Banco de España, issue Autumn.
    19. Jaime Terceiro Lomba, 2019. "The energy transition and the financial system," Revista de Estabilidad Financiera, Banco de España, issue Autumn.
    20. Jaime Terceiro Lomba, 2019. "The energy transition and the financial system," Financial Stability Review, Banco de España, issue Autumn.
    21. Andreas Richter & Thomas C. Wilson, 2020. "Covid-19: implications for insurer risk management and the insurability of pandemic risk," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 45(2), pages 171-199, September.
    22. Amandha Ganegoda & John Evans, 2014. "A framework to manage the measurable, immeasurable and the unidentifiable financial risk," Australian Journal of Management, Australian School of Business, vol. 39(1), pages 5-34, February.
    23. Christian Hugo Hoffmann & Charles Djordjevic, 2020. "Complexity, Power Laws and a Humean Argument in Risk Management: The Fundamental Inadequacy of Probability Theory as a Foundation for Modeling Complex Risk in Banking," Homo Oeconomicus: Journal of Behavioral and Institutional Economics, Springer, vol. 37(3), pages 155-182, December.
    24. PARYS, Wilfried, 2020. "David Ricardo, the Stock Exchange, and the Battle of Waterloo: Samuelsonian legends lack historical evidence," Working Papers 2020009, University of Antwerp, Faculty of Business and Economics.

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