Risk Management Failures: What are They and When do They Happen?
René M. Stulz
Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Fisher College of Business Working Paper No. 2008-03-017
Charles A. Dice Center Working Paper No. 2008-18
A large loss is not evidence of a risk management failure because a large loss can happen even if risk management is flawless. I provide a typology of risk management failures and show how various types of risk management failures occur. Because of the limitations of past data in assessing the probability and the implications of a financial crisis, I conclude that financial institutions should use scenarios for credible financial crisis threats even if they perceive the probability of such events to be extremely small.
Number of Pages in PDF File: 25
JEL Classification: G20, G32
Date posted: October 6, 2008