Monday, December 22, 2008

Three Questions

1. In assessing risk in financial models, how effective are current modeling methodologies in incorporating model error or model uncertainty? Specifically, have these models appropriately captured the implications for underlying statistical relationships of the impacts of aggregate shocks?
2. Do we have adequate tools and methodologies to stress test these models? This is particularly challenging in the area of consumer credit portfolios and their dependence on expected loss distributions.
3. How should we evaluate the trade-off, if any, between undertaking policy interventions aimed at combating short-run financial instability and the potential financial market distortions and moral hazard that could result from those interventions?

-Importance of Financial Econometrics for Financial Innovation and Financial Stability

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