Monday, July 23, 2007

Market risk and derivatives: interview

Catching up with some of the latest Financial Sense Newshour broadcasts, I'm currently listening to an interview with Richard Bookstaber, author of the new book on financial markets and derivatives risk, A Demon of Our Own Design.

The premise of Bookstaber's book, as he tells FSN host Jim Puplava, is that some of the more notable crashes in recent financial history were driven not by economic events, but rather by the growing use of complex financial instruments known as derivatives.

According to Bookstaber, whose career was spent creating and studying derivatives and risk management models, markets have become increasingly crisis prone with the increase of financial engineering.

While he feels that derivatives serve a legitimate purpose, he also believes that their widespread use creates greater complexity and an increased likelihood of unforeseen effects, such as the portfolio insurance cascade of the 1987 stock market crash, and the 1998 blowup of Long Term Capital Management (LTCM).

According to host Jim Puplava, and other reviewers, Bookstaber's book is supposed to be a very readable account of how these sometimes arcane derivative instruments can shape market risk. If you'd like to get a sense of what you'll find within, have a listen.

The interview is available here. Check it out.