Large Bank Examination Workshop February 2026

Risk in LTCM • LTCM claimed that its daily target volatility before the crisis was $45 million, which is consistent with average US equity volatility. • Value at Risk (VaR) calculations based on this target volatility show that the fund’s worst dollar loss at the 99% level over a month should have been about $400 million. But the fund lost $310 million in May and $450 million in June, before the Russian default. In August, it lost $1.7 billion. • Stress tests of a strategy mimicking that of LTCM show that a fall in correlation like that experienced in the crisis would reduce the monthly equity coverage or safety factor from 12.3 to 5.6.

Source: Jorion, P., ‘Risk Management Lessons from Long-Term Capital Management’, European Journal of Financial Management, Vol. 6, September, 200, pp. 277-300.

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LTCM and Model Risk 1. What models did LTCM use in implementing its investment strategy and monitoring risk? 2. Which of the following factors do you think was most significant in the collapse of LTCM? a) Errors in models b) Misuse of models c) General failure to monitor and manage financial risk

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