Gary Venter, Managing Director, Instrat®Much of the current crisis can be traced to models that failed to adequately reflect risk, both in housing costs and complex financial instruments. Even if historical homeprice data had never recorded changes like those realized recently, data from other bubbles, from tulip bulbs on, could have been used. It was not clear that housing was in a bubble, but bubble scenarios should have been in the models. Those model issues need to be, and are being, addressed, but here the focus is on liquidity risk.
Read the entire article in Risk Management: The Current Financial Crisis, Lessons Learned and Future Implications, presented by the Society of Actuaries, The Casualty Actuarial Society, and the Canadian Institute of Actuaries