Future of Finance Beyond 'Flash Boys': Risk Modeling for Managing Uncertainty in an Increasingly Non-Deterministic Cyber World: Knight Reconsidered: Risk, Uncertainty, and Profit for the Cyber Era (Presentation Slides)
Princeton Quant Trading Conference 2015
55 Pages Posted: 8 Apr 2015 Last revised: 13 May 2018
Date Written: April 4, 2015
This presentation reconsiders Knight's Risk, Uncertainty, and Profit of 1921 in light of the emergence of the World Wide Web in early-1990s, Emanuel Derman's pioneering work in Model Risk Management at Goldman Sachs in mid-1990s, backlash against quantitative models in aftermath of the Global Financial Crisis of 2007-2009, and the post-Snowden Cyber era starting around mid-2013.
Based upon review of related financial risk modeling practices and exponentially increasing Cyber era uncertainty, it helps advance mainstream Finance practices of risk modeling and uncertainty management to enable them to meet the needs of Cyber-Finance which is the emerging Future of Finance. It will help Finance researchers and practitioners recognize that the current mainstream focus of financial risk modeling is on the metaphorical 'tip' of the iceberg, with significant risks that may not as readily meet the human eye.
With its information-based view on cyber-risk as the predominant risk that will subsume most traditional financial risks such as credit risks and market risks, it will help them recognize the exponentially increasing tail risks and systemic risks characterizing the highly systemic, interdependent, and correlated cyber risks which in turn characterize financial risks. Based on research of two-decades started around the emergence of the WWW on how to 'anticipate surprise' when ‘prediction’ of risk is infeasible, it explores advances in quantitative risk models, statistical methodologies, and, computational statistical technologies to facilitate dialog on the above issues of central concern to both the Future of Finance and the Future of Risk.
Keywords: Model Risk Management, Value at Risk, VaR, T-VaR, ES, GARCH, ARCH, EVT, Power Laws, Bayesian Inference, Markov Chain Monte Carlo Models, FIX, FAST, Cyber Finance, Cyber Risk, Risk Modeling, Knightian Uncertainty Management, Uncertainty Modeling, Cyber Warfare, HFT, High Frequency Trading, Flash Boys
JEL Classification: G1, G11, G12, G14, G18, H56, E4, E44, E47, G00, C5, C50, C51, C52, C3, C59, C00, C10, C11, C13, C14
Suggested Citation: Suggested Citation