Put Some Friction in Your Risk Model

Coverage of the 2010 Risk Management Conference.

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bike tireWhen it comes to risk management, more isn’t necessarily better, said Ian Baker, vice-president, derivatives and risk management with Pyramis Global Advisors, at the 12th annual Risk Management Conference in Muskoka, Ont. “You want to actively look for differentiated models. You want a little bit of friction in those models,” he said, adding that his motto is All models are wrong; some are useful.

Risk managers, Baker said, aren’t as smart as they sometimes think they are. In fact, they learned some valuable lessons from the crisis:

• assume liquidity is not there when you need it;

• rebalancing only works with liquidity;

• keep leverage away from vital organs; and

• systemic risk is not diversifiable.

Going forward, managers need to focus on liquidity risk. They haven’t done a great job of it, said Baker, but they’re getting better. “They need to understand qualitatively and quantitatively the interactions among all component parts of a portfolio.”

Brooke Smith is managing editor of Benefits Canada. brooke.smith@rci.rogers.com

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