Examination of VAR after Long Term Capital Management

Risk Management In Financial Institutions, Spring 2005

Posted: 19 Jul 2012 Last revised: 9 Feb 2014

See all articles by Orhun Hakan Yalincak

Orhun Hakan Yalincak

State University of New York, Empire State College Alumnus; New York University, College of Arts and Sciences (Candidate)

Yu Li

Independent

Mike Tong

Independent

Date Written: May 2, 2005

Abstract

The 1998 failure of Long-Term Capital Management (‘LTCM’), a very large and prominent Greenwich, Connecticut based hedge fund, is said to have nearly brought down the world financial system. Over the years, few financial debacles such as LTCM, have been so often written about or discussed without a firm conclusion on what went wrong. What brought the 'genius' managers of LTCM to their knees? Was it hubris, or was it something more? Various commentators have jumped on LTCM’s significant leverage ratio or engaged in second-guessing of management’s decision in 1997 to return $2.7 billion of investor capital to increase leverage, and thereby, returns. Others have faulted the lack of transparency at LTCM or faulted regulators for a lack of oversight, criticized regulators for arranging the bailout, while others still have pinpointed the debacle on the failure of LTCM’s risk management prowess. This paper avoids the blame and identifies the multiple factors, both management risk management blunders, as well as inherent flaws in the risk metric used by LTCM – Value at Risk (VaR) – a commonly used risk metric in the financial industry today.

Keywords: Hakan Yalincak, long term capital management, Hakan Yalincak NYU, value at risk, normal distribution, Gaussian, risk management in financial institutions, swap spreads, equity volatility, merger arbitrage

Suggested Citation

Yalincak, Orhun Hakan and Yalincak, Orhun Hakan and Li, Yu and Tong, Mike, Examination of VAR after Long Term Capital Management (May 2, 2005). Risk Management In Financial Institutions, Spring 2005, Available at SSRN: https://ssrn.com/abstract=2111897

Orhun Hakan Yalincak (Contact Author)

State University of New York, Empire State College Alumnus ( email )

Vestal Parkway East
Binghamton, NY 13902
United States

New York University, College of Arts and Sciences (Candidate) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Yu Li

Independent

Mike Tong

Independent

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