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The Quantitative Revolution and the Crisis

The popular press and a recent spate of remarkable books have pointed critically to the contribution of financial innovation and quantitative models to the financial crisis. The broader critiques doubt the risk management capabilities of firms and regulators to understand and evaluate complex financial instruments, such as synthetic securities.

These critiques cut at the core of the Basel II international regulations which permitted banks to create their own models to value illiquid and risky assets. They also have major implications for the design of a regulatory system and regulations regarding whether regulation is at all possible, who is best able to do it, and ultimately if complex financial innovation should be sharply curtailed.

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