Risk Management: Historical Perspectives

Abstract Financial risk management builds on the work of pioneers in financial theory. Spurred by the rapid expansion of derivatives markets, new risk‐management tools were developed in response to the need to manage financial risks better. This led to the development of position‐based risk measures such as Value at Risk (VAR), which are now widely used. Later, these methods were extended to other types of risk such as credit and operational risk. In spite of these technical advances, however, risk managers need to be keenly aware of the limitations of these models. Even so, risk management has now become an essential function for financial institutions.