Doctor, Heal Thyself!

A client recently emailed me this link to an article about JP Morgan having discovered an error in their firm-wide calculation of Value-at-Risk, the industry standard measurement used to quantify risk.  His email concluded with:

“They are using a spreadsheet!!!”

You read that correctly.  JP Morgan – the firm that famously invented Value-at-Risk in the 1990’s – is apparently using a spreadsheet for this calculation.  This revelation is simply astounding.  If true, it would mean they really are sitting on a house of cards.  The article quotes the JP Morgan Task Force on VaR: “the spreadsheet divided by their sum instead of their average, as the modeler had intended. This error likely had the effect of muting volatility by a  factor of two and of lowering the VaR…. It also remains unclear when this error was introduced in the calculation.”

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