Document Type

Conference Proceeding

Publication Date

2010

Abstract

As the financial crisis of 2008 has revealed, there are some flaws in the models used by financial firms to assess risk. Credit, volatility, and liquidity risk were all inadequately modeled by supposedly sophisticated financial institutions employing dozens of financial engineers with advanced degrees. It is now clear that some of the underlying assumptions of the statistical models utilized were seriously flawed, and interactive and systemic effects were improperly modeled. Correcting these modeling flaws is one approach to preventing a reoccurrence. However, another approach is suggested by Six Sigma quality programs used in manufacturing and service industries. Some basic tenets of the Six Sigma programs are directly applicable to improving risk management in financial firms and in portfolio design. These include the features of over-engineering, robust design, and reliability engineering

Comments

Paper presented at The Association on Employment Practices and Principles (AEPP) Eighteenth Annual International Conference 29 September – October 1, 2010, University of San Francisco, San Francisco, CA

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