The Lights Are On
Research Paper
October 1, 2006
Preview
After lamenting in our last issue that we had not seen any specific market events in 2006, we were delivered the Amaranth episode in September. Unfortunately, some of the loudest commentary in the aftermath has come from the "throw out the models" camp, lumping the recent natural gas market events with other surprises that models failed to recognize. We argue that this is misguided, and that in this case, particularly viewed from the perspective of how large the losses were, even simple risk models provided good warning signals of the trouble ahead. By no means are the models perfect, but the extremist conclusion that they are useless distracts us from saner lessons.
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