BlackRock, which manages $4.8 trillion in assets, has determined its risk models are no longer reliable because of extreme fluctuation in the international fixed-income market. Volatility is so extreme that it has almost no relationship to bond-market history.
The interest-rate risk confronting holders of Japanese government bonds is rising and volatility is showing up in the bond market, the Bank of Japan said. "The amount of interest rate risk on yen-denominated bonds held by financial institutions has increased somewhat from the level observed in the previous report," the central bank said in its semiannual Financial System Report.
Figures released by 12 major banks revealed a 26.2% drop in average Value at Risk over the course of 2010. That VAR figures continued to drop -- even through the sovereign debt crisis when markets were volatile -- indicates both that bankers are taking less risks, and that VAR may not be an ideal tool for gauging the state of the market.
Lehman Brothers' collapse will no longer be reflected starting in mid-September in many value-at-risk models, which banks use to calculate acceptable risk-taking. If banks start taking chances, markets could experience an increase in volatility and trading volumes. If not, it will indicate that banks are not simply relying on VAR models. "I think this will be a good test of banks' risk-management areas," said Peter Rothwell, senior manager in KPMG's group for financial risk management.