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On the White Board - February 2008
Feb 15, 2008
Ten years ago, we all thought that the integration of credit and market risks would be the great modeling challenge of the next decade. Today, if you were to ask what we have been doing during all that time, depending on how many cups of coffee this researcher has had in the morning, he might respond either that we solved the problem long ago or that we have made no progress at all. This schizophrenia derives from the fact that the problem of credit and market risk has taken on many guises, some unforeseen ten years ago. But it also comes from the realization that the division of risks into market and credit, while useful in banking before the 1990s, now makes the problem of assessing overall risk more difficult. A better way of thinking about the problem is by risk horizon, and that the relative importance of different types of risks changes depending on the horizon. As we lengthen the horizon, we then hit against the problem of portfolio aging, which is only recently being discussed in an open forum. There are many different directions this problem could evolve from here. See our most recent Research Monthly for more discussion.