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Journal of Financial Econometrics Advance Access originally published online on December 9, 2008
Journal of Financial Econometrics 2009 7(1):40-51; doi:10.1093/jjfinec/nbn018
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© The Author 2008. Published by Oxford University Press. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.

Correlation, Models, and Risk Management in Challenging Times

Robin L. Lumsdaine
     American University

Address correspondence to Robin L. Lumsdaine, Kogod School of Business, American University, 4400 Massachusetts Avenue NW, Washington, DC 20016, or e-mail: robin.lumsdaine{at}american.edu


  Abstract

This paper considers correlation, models, and risk management in light of recent financial market events. It begins with a review of key contributing factors, then considers the role of liquidity in measuring default risk, and highlights some lessons learned from the experience as events continue to unfold. It concludes by discussing some key ways in which regulators are moving forward to address the current situation, mitigate future risk, and strengthen the resiliency of the global financial system.

The June 4, 2008 talk on which this paper is based was delivered at the inaugural meeting of the Society for Financial Econometrics (SoFiE) while the author was an Associate Director at the Board of Governors of the Federal Reserve System. Then, as in this paper, the views expressed are solely those of the author and do not necessarily represent those of the Board or other employees of the Federal Reserve System. Discussions with numerous colleagues have helped shape these views and should be acknowledged; in particular, I am grateful to Marius Rodriguez for substantial assistance with the talk and to Michiel de Pooter and meeting participants for helpful comments and suggestions.

Received September 8, 2008; revised October 24, 2008; accepted October 27, 2008


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