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March 11, 2013


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Risk Management


Miller Risk Advisor's founder, Ross Miller, had his trial-by-fire in risk management when Kidder, Peabody became embroiled in the government bond trading scandal that ultimately led GE to sell the firm to PaineWebber, which is now part of UBS.

Ross was told to drop everything and lead a risk management "SWAT team" to each of GE Capital's major businesses to nip any other problems in the bud. A Framework for Risk Management in Diversified Financial Companies (written with David P. Greene, who is now at IBM), gives a peek at the methods used to assess the major risks in a global financial enterprise.

When Ross M. Miller & Associates became Miller Risk Advisors in 1996, it was the first consulting firm to specialize in credit risk analytics. A Nonparametric Test for Credit Rating Refinements was the first study that compared the accuracy of two credit risk rating systems--those of Standard and Poor's and KMV. Within a year of its publication in Risk Magazine under the title "Refining Ratings," it was being reprinted as one of the classics in credit risk management.

As a early user of the risk management tools that began to flood the market in the late 1990s, Miller Risk Advisors noticed that the correlation structures was dangerously inflexible and might tend to underestimate risk, which was a major part of the problem that brought down Long-Term Capital Management. Ross Miller and Evan Schulman's Money Illusion Revisited: Linking Inflation to Asset Return Correlations, which was published in the Journal of Portfolio Management in Spring 1999, was not only the first paper to show a systematic variability in correlations but also provided a behavioral explanation for why that could happen.

When dealing with large enterprises, it can be impossible to compute correlations among business units. Treynor-Black Revisited: A New Application to Enterprise-Wide Portfolio Optimization shows how the Treynor-Black model can be used as a starting point for getting handle of enterprise-level risk. This article appeared as Training the Portfolio in the November 1999 issue of Risk Magazine.

Early in 2001, Miller Risk Advisors saw the danger signs at Enron. Ross Miller teamed up with energy consultant Peter Fusaro to write What Went Wrong at Enron. The book immediately made best-seller lists around the world and spent four months in the top ten New York Times business paperbacks.

Bubbles in asset market pose their own risks and this topic is discussed separately in the Experimental Finance section of this site and at full length in the book Paving Wall Street: Experimental Economics and the Quest for the Perfect Market,.

Miller Risk Advisors continues to explore the frontiers of finance and risk management. Ongoing projects include the examination of vulnerabilities in mutual-fund trading systems and new approaches to equity factor models.