Aug
18
“Once the risk model is specified, the traders will try to find a way around it. Are you measuring DV01 risk? Well, fine, then I will do DV01-neutral yield curve trades. Now are you measuring yield curve risk? Fine, then I will do DV01 and yield curve neutral butterfly trades. One of the problems with VaR – and for that matter with any complex model – is that it opens up all the more dimensions for such gaming, and for gaming in a way that is harder to detect. Maybe this can be put into a model, but if it can, it won’t look like how things are modeled in physics.”
Rick Bookstaber: Physics Envy in Finance
