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The Sanford C. Bernstein & Co. Center for Leadership and Ethics and the Center on Japanese Economy and Business, released a report as a follow-up to a December research symposium on "The Quantitative Revolution and the Crisis: How Quantitative Financial Models Have Been Used and Misused." The report explores the impact of quantitative financial models during the recent financial 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. These critiques have cited particular statistical approaches, such as the Gaussian copula, for massively underestimating systemic risk. 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.
This report provides perspectives from academic and financial professionals as well as a deeper look at quantitative finance.