So disappointed by risk management professionals

AlexYang · 6/3/15

Hello, I'm new to this site. I'm about to start a risk management job in the firm where I interned with last summer. I came from an economic and mathematical background. I thought people in risk management area could not be too bad in understanding some basic theories behind what they are doing. But what suprised me was the fact that these risk management guys even very senior risk managers don't have a clue of the basic statistical and mathematical theories behind the calculation of value-at-risk (parametric VaR in particular). I am just so suprised and disappointed about this. Maybe it's just this firm. I wonder if the risk management people who are paid to mange risk are capable of doing their job without a quantitative background.

IntoDarkness · 6/3/15

only a small portion of risk management involves knowing var...

Andy Nguyen · 6/3/15

Waiting for @Ken Abbott to comment on this. He is the senior one with the quantitative background. I don't know the percentage of people in RM with that background.

jcchien · 6/3/15

which kind of firm are you working for ? This situation is possible. In fact, in business world, unless you are in quantitative research department or quantitative risk management, academia materials/theory isn't so important on daily work.........

mhy · 6/3/15

AlexYang said:
Hello, I'm new to this site. I'm about to start a risk management job in the firm where I interned with last summer. I came from an economic and mathematical background. I thought people in risk management area could not be too bad in understanding some basic theories behind what they are doing. But what suprised me was the fact that these risk management guys even very senior risk managers don't have a clue of the basic statistical and mathematical theories behind the calculation of value-at-risk (parametric VaR in particular). I am just so suprised and disappointed about this. Maybe it's just this firm. I wonder if the risk management people who are paid to mange risk are capable of doing their job without a quantitative background.

So if they don't understand the calculation of risk, what do they do all day in the office?

Keith Tan · 6/3/15

there are many kinds of risk managers. the kind you expect are those quantitative types implementing all the math stuffs.

On the other hand, such risk functions have already been so automated to the point where anyone monitoring these systems call themselves 'risk managers'. i think you are in this situation. their main function to generate risk value outputs from the system, checking values and do market surveillance. banks name them 'market risk department'

zyz · 6/3/15

mhy said:
So if they don't understand the calculation of risk, what do they do all day in the office?

There are lots of other stuff except VaR. Some examples are stress-testing, scenario analysis, balance sheet risk, etc. Sometimes there are unique transactions where risk should be evaluated on stand-alone basis and holisteically. There is also interaction with other departments so this all depends on firm structure and businesses.

What I understood is that many of those ambitious ones who enter this field lose their motivation after a while and euphoria fades away. Parametric VaR might be an important thing to know, but when profit centers constantly ask you to revise your measure in order to do business, this becomes somewhat irrelevent.

AlexYang · 6/4/15

IntoDarkness said:
only a small portion of risk management involves knowing var...

But still, VaR is the fundamental technique used in risk management. I would expect anyone working in RM to understand the logic behind it, not just some manual calculation or drag some number out from a system

AlexYang · 6/4/15

Andy Nguyen said:
Waiting for @Ken Abbott to comment on this. He is the senior one with the quantitative background. I don't know the percentage of people in RM with that background.

Thanks for you responce, Andy. In my opinion, I understand that quantitative skills are not the whole story of RM, but people not having the required quantitative skills should not be in a highly important senior RM position at all. I assume it's because banks cannot afford to pay a competitive salary to attract the most capable talent. Myself working in this bank in this position, it's only because they are willing to sponsor me a visa in a short time.

AlexYang · 6/4/15

mhy said:
So if they don't understand the calculation of risk, what do they do all day in the office?

Like Keith Tan said, their main daily activities are to monitor some system, calculate some risk measure output, set limits to these measures, and report them to senior management. But still, they need to understand the logic and fundamental theory behind all the measures they are using and monitoring.

AlexYang · 6/4/15

Keith Tan said:
there are many kinds of risk managers. the kind you expect are those quantitative types implementing all the math stuffs.

On the other hand, such risk functions have already been so automated to the point where anyone monitoring these systems call themselves 'risk managers'. i think you are in this situation. their main function to generate risk value outputs from the system, checking values and do market surveillance. banks name them 'market risk department'

Thanks , Keith. I am indeed in the situation you described. I think I am in a wrong position where I cannot use my quant skills to the full.

AlexYang · 6/4/15

zyz said:
There are lots of other stuff except VaR. Some examples are stress-testing, scenario analysis, balance sheet risk, etc. Sometimes there are unique transactions where risk should be evaluated on stand-alone basis and holisteically. There is also interaction with other departments so this all depends on firm structure and businesses.

What I understood is that many of those ambitious ones who enter this field lose their motivation after a while and euphoria fades away. Parametric VaR might be an important thing to know, but when profit centers constantly ask you to revise your measure in order to do business, this becomes somewhat irrelevent.

These RM people then have to challenge these front office people. They have to fight. Otherwise, they are just some puppet whose existence is only to deceit regulatory bodies into believing the bank is managing risk, but in fact it is not.

mhy · 6/4/15

AlexYang said:
Like Keith Tan said, their main daily activities are to monitor some system, calculate some risk measure output, set limits to these measures, and report them to senior management. But still, they need to understand the logic and fundamental theory behind all the measures they are using and monitoring.

Right, but it seems pointless to hire someone to calculate risk (even using some automated system) if they don't understand how risk is calculated.

IntoDarkness · 6/4/15

im not so sure whether im in the front office. but i wouldn't let risk management or any second line of defense "challenge" too much of what i do, since they normally cant quantify their contribution in the revenue generating process. i bully market risk all the time. feel so good...

IntoDarkness · 6/4/15

btw, if op thinks his quant skill underutilized, he can develop his own framework and methodology of calculating some of those "risk metrics", then implement them, and see whether they contribute anything to making money...

TheComplexUnit · 6/4/15

Out of curiosity, do people in the industry base their VaR calculations on normal distributions (as practitioner exams such as the FRM would have you believe)? In that case the entire enterprise is truly laughable.

IntoDarkness · 6/4/15

well, it depends. gaussian distribution works most of the time. one of our capital approaches assumes gaussian. and the calculated var bounds the time series really well. why bother changing that?

AlexYang · 6/4/15

IntoDarkness said:
im not so sure whether im in the front office. but i wouldn't let risk management or any second line of defense "challenge" too much of what i do, since they normally cant quantify their contribution in the revenue generating process. i bully market risk all the time. feel so good...

I know. I heard a lot of story from RM colleagues of how front office guys bully and suppress them
in their daily work

AlexYang · 6/4/15

TheComplexUnit said:
Out of curiosity, do people in the industry base their VaR calculations on normal distributions (as practitioner exams such as the FRM would have you believe)? In that case the entire enterprise is truly laughable.

They maily use historical simulation. But when it comes to calculate VaR using parametric methods, they do normally assume normal distribution. I never heard from any one in this bank that people are using non-normal distribution such as student t distribution or skewed student t distribution.

C S · 6/5/15

AlexYang said:
Hello, I'm new to this site. I'm about to start a risk management job in the firm where I interned with last summer. I came from an economic and mathematical background. I thought people in risk management area could not be too bad in understanding some basic theories behind what they are doing. But what suprised me was the fact that these risk management guys even very senior risk managers don't have a clue of the basic statistical and mathematical theories behind the calculation of value-at-risk (parametric VaR in particular). I am just so suprised and disappointed about this. Maybe it's just this firm. I wonder if the risk management people who are paid to mange risk are capable of doing their job without a quantitative background.

This sounds like another "I'm the smartest guy I know" post. For various hopefully evident reasons, I am often skeptical of this type of post.