A Framework to Manage the Measurable, Immeasurable and the Unidentifiable Financial Risk

39 Pages Posted: 18 Apr 2012

See all articles by John R. Evans

John R. Evans

Centre for Analysis of Complex Financial Systems

Amandha Ganegoda

ANZ (Australia and New Zealand) Banking Group, Ltd.

Multiple version iconThere are 2 versions of this paper

Date Written: April 18, 2012

Abstract

Traditionally, financial risk management has mainly focused on the types of risk that can be identified and measured. Many actuarial and statistical theories and models have been developed in the past, to quantify such risks. However, high profile events such as Black Monday, the Asian financial crisis, 9/11 terrorist attacks, the Enron scandal, and more recently the Global financial crisis, has repeatedly proven to the financial world that risks which matter to the stability of financial firms are often immeasurable and unidentifiable. Hence, simply focusing on the measurable risks is inadequate for a sound management of financial risks. In this paper, we develop a holistic framework to identify (if possible), measure (if possible), and manage the measurable, as well as the immeasurable, and the unidentifiable risks. We identify four realms of financial uncertainties and point out that each realm possesses a unique set of challenges to risk management. Moreover, we show that the tools needed to grapple each realm of uncertainty are fundamentally different, therefore stressing the importance of the need for awareness of these separate realms of uncertainty. The paper provides a discussion of methods available for assessing and managing each realm of uncertainty, and their limitations, by drawing from risk management techniques used in various fields of science and other industries.

Keywords: financial risk management, known, unknown and unknowable risk

JEL Classification: G32, D81, H12

Suggested Citation

Evans, John R. and Ganegoda, Amandha, A Framework to Manage the Measurable, Immeasurable and the Unidentifiable Financial Risk (April 18, 2012). Available at SSRN: https://ssrn.com/abstract=2041834 or http://dx.doi.org/10.2139/ssrn.2041834

John R. Evans (Contact Author)

Centre for Analysis of Complex Financial Systems ( email )

PO Box 363
Summer Hill, 2130
Australia

Amandha Ganegoda

ANZ (Australia and New Zealand) Banking Group, Ltd. ( email )

Melbourne, Victoria
Australia

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