Quantitative Finance: Friend or Foe?
The subprime crisis of 2007 and the global recession that followed have gotten financial analysts thinking. Given the systemic nature of the crisis, the tools financial institutions used to develop their lending and investment banking units have been examined for weaknesses. Flaws attributed to financial engineering have been singled out on several occasions. This article starts by introducing a simple risk model that takes extreme risks into account and then runs an out-of-sample analysis of the years 2007–2008. We continue with an analysis of modern pricing models and lessons learned from the crisis.
Models do not accurately render ...