Question on handling position sizing with 'unknown unknowns' in compliance

asked by u/value_vik · 5d · 1 answers

Been diving deeper into compliance documentation, especially around market risk and operational risk. Most frameworks give good guidance on what's known – market volatility, credit defaults, liquidity squeezes. We stress test for these, right? But what about the stuff you genuinely can't foresee? Think a sudden regulatory change that invalidates a key derivative contract across a jurisdiction, or a completely novel cyber threat that bypasses all current security protocols.

My question is, how do experienced risk managers actually account for these 'unknown unknowns' when determining position sizing or capital allocation? Is it just baked into a general 'cushion,' or are there specific, perhaps more qualitative, methodologies applied? I'm struggling to see how you quantify something that, by definition, isn't quantifiable yet you still need to prepare for it without crippling your ability to trade effectively.

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  • u/pip_hunter_ola· 1 pts· 5d

    That's an interesting point. Most models struggle with true black swans. Perhaps it comes down to building enough capital reserves for those extreme, unforeseen events, or having very broad diversification that insulates you from jurisdiction-specific shocks.

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