Quant ideas: Do we need realistic models?
Realistic models not necessarily a prerequisite for successful risk management
It is a major and unspoken assumption in virtually any academic treatment of commodities that realistic models are a prerequisite for successful risk management. Yet, in practice, realistic models are rarely used. Models that are grossly simplified or even downright wrong are, as a rule, the mainstay of many a risk management operation. This presents a puzzle. If the realistic models are really a prerequisite, then why is the practice so different?
Obviously, part of the answer flows from the
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