“…only one year in fifty should it lose at least 20% of its portfolio.”
And of course, it proceeded to lose essentially all of its portfolio after operating for just a handful of years. Now if in fact you are correct and the LTCM’ers did understand things might be correlated and that tail probabilities would not be gaussian, how do you imagine they even made a calculation like that?
Can we get a bit more specific than waving around marketing materials?
Precisely which things turned out to be correlated that LTCM people assumed to be uncorrelated and precisely the returns on which positions the LTCM people assumed to be Gaussian when in fact they were not?
Or are you critiquing the VAR approach to risk management in general? There is a lot to critique, certainly, but would you care to suggest some adequate replacements?
An LTCM investor letter, quoted here, says
And of course, it proceeded to lose essentially all of its portfolio after operating for just a handful of years. Now if in fact you are correct and the LTCM’ers did understand things might be correlated and that tail probabilities would not be gaussian, how do you imagine they even made a calculation like that?
Can we get a bit more specific than waving around marketing materials?
Precisely which things turned out to be correlated that LTCM people assumed to be uncorrelated and precisely the returns on which positions the LTCM people assumed to be Gaussian when in fact they were not?
Or are you critiquing the VAR approach to risk management in general? There is a lot to critique, certainly, but would you care to suggest some adequate replacements?