Equal Valuation and Risk Management?

Valuation and risk management, two sides of the quant business, must be treated with equal sophistication, with equal respect, and with equal suspicion. And there must be closer interaction between them. At every stage of valuation and model development you must be asking questions about risk and robustness. It is dangerous to come up with some fancy model and only afterwards start asking questions about model error. Anyone who has ever calibrated a model knows that the methods used to mitigate model risk almost come as an afterthought, and are totally inconsistent with the original model.

This is an original text from Paul Wilmott's latest blog.
We, at UnRisk, second. Each single task in quantitative finance can become complex and bear the danger of fundamental mistakes that can become horrible in interplay. Intransparent math can be dangerous. Calibration problems shall be treated with an inverse problem view (ill-poses at its nature). You need to distinguish between models and their algorithmic representations (what is the use of an additional factor, if its extra information gets lost in the numerical jungle). And you need technologies which allow you to make the extra model- and cross model validation and scenario runs for testing adequateness and robustness.


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  2. They used a lousy appraiser and did a poor job reviewing the appraisal in "quality control" even after they sat on it for a long time. The appraisal came in $70k below purchase price.
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