December 16, 2010
Risk Management Adds Value - Evidence
Evidence is growing that risk management adds value.
Two papers that have recently been shared with me looked very specifically to answer questions about the impact of risk management programs at firms and both have found the answer to be in the affirmative.
The first paper looks for evidence of an impact on firm value when Enterprise Risk Management (ERM) programs are in place. They find a positive relation between firm value and the implementation of ERM -- roughly a 20% value premium -- which is statistically and economically significant
The second paper, which Jean Hinrichs shared with me, focuses on the application of risk management models and the use of risk officers at hedge funds and finds:
- Funds in their sample that used formal models performed better in the extreme down months of 2008 and, in general, had lower exposures to systematic risk.
- Funds employing value at risk, stress testing and scenario analysis had more accurate expectations of how they would perform in a short-term equity bear market.
It is one of my professional missions that we make risk management primarily a positive contributor to better business decisions and to avoid the trap of focusing only on the loss side of the distribution and loss avoidance.
It's good to see that academic evidence is growing that a positive impact from risk management can be measured, even at this early stage of development in the risk profession. This supplements our individual practical experiences that we relay to others.
Posted by dkoenig at 10:45 AM
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