Financial Risk and Financial Risk Management Technology (Rmt): Issues and Advances
36 Pages Posted: 31 Oct 2008
Date Written: September 1991
Methods for sound risk management are of increasing interest among Wall Street investment banking andbrokerage firms in the aftermath of the October 1987 crash of the stock market. We present an overview of thebasic definitions and issues related to risk, and the management of financial risk and financial risk managementtechnology (RMT) for information systems (IS) technology professionals. We discuss of the content of riskmanagement technology, including the models, the software and hardware, and the market data required to trackrisk. We also discuss the identification of risky events, alternative approaches to the measurement of risk, andhow investment firms go about formulating strategies to control financial risk.We next show how changes in the information technologies supporting these tasks have led to improvements inthe control of risk and in the design of products which involve financial risk. Advances in five areas that areof interest are: communications software, object-oriented programming, the use of parallel processors andsupercomputers, and the application of artificial intelligence and neural nets. Although these new informationtechnologies create significant opportunities to improve global and departmental risk management, a basicquestion that must be addressed involves the costs associated with their implementation. Thus, a thirdcontribution of this paper is to analyze the extent to which the implementation of these technologies will affectfirm costs. To this end, we evaluate the components of the cost function for risk management, and considersome ways that the new technologies can be applied to reduce overall costs.
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