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Subjective Beliefs and Statistical Forecasts of Financial Risks: The Chief Risk Officer Project

Chapter

Abstract

Information about financial risks comes from many sources. We formally consider how one can elicit and use information from two important sources when making forecasts. One source is a traditional statistical forecast, using familiar econometric methods for extrapolating from the past to the future. The other source is the elicited subjective belief distributions of “experts” in this domain: Chief Risk Officers of major international corporations. We demonstrate how these beliefs can be elicited in a formal, structured and incentivized manner, and critically contain information on the precision of the individual’s belief for each risk. We characterize the manner in which these two sources tell different stories about these risks, arguing that any distributional differences, or similarities, between the two sources are informative for risk managers. Finally, we characterize the degree of consistency among our experts: are they “on the same page” in their beliefs? We argue, again, that consistency or inconsistency of subjective beliefs is in itself informative for risk managers.1

Keywords

Financial Risk Credit Default Swap Spot Price Concordance Index Subjective Belief 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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© Glenn W. Harrison and Richard D. Phillips 2014

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