CHAPTER

QUALITATIVE 30
DIMENSIONS IN
FINANCE AND RISK
MANAGEMENT
RESEARCH
By Kevin Dowd
INTRODUCTION
 This chapter looks at the qualitative dimensions of
finance and risk management research, and it is probably
best if I begin by explaining my qualifications (such as
there are) to pontificate on this subject. By background I
am a frustrated historian (which must be a plus in this
context) who went on to become an academic economist
(which is obviously be a negative). Admittedly, I have
always been interested in methodological and
organizational issues (which must have some merit), and
I supervised a PhD not so long ago based almost entirely
on an interview-based methodology. So I don’t really
know much about qualitative research, although that
hasn’t stopped me occasionally dabbling with it in the
past.
 However, I do have some experience of quantitative
research, and standard quantitative methodology looks to
me to be a lot easier. For a (hopefully, small) set-up cost
— you learn some statistics, work out how to run some
specialist software, and so forth — you gradually get a
feel for the basic procedure, and after some experience
you get to be quite good at operating the sausage
machine. You form your hypothesis, get your data,
estimate some equation, carry out your tests, discuss
your results, and that’s more or less it.
 I would like to begin by providing some background
context to explain where I am coming from: how I got
interested in this area, my experiences and what I have
learned working in it, and so forth. After that, I will try
to convey an impression of what (I think) the subject
itself is really like. After taking a brief pause to discuss
epistemology, I go on to suggest some areas where I
think there is a great deal of scope for good qualitative
research in finance and risk management, and the final
section offers some conclusions and reading.
WORKING IN RISK MANAGEMENT AND
VAR: A PERSONAL PERSPECTIVE
 My interest in the risk management area began as an
offshoot of an earlier interest in the financial health and
stability of banks: their capital, credit ratings, and so on.
I had been working on these issues for some time
without much success, by the way and in early 1995, I
began to find references to the notion of ‘value at risk’.
When I looked into it, I gradually realised that VaR was
probably the key to understanding the problems I was
working on, so I decided to take a temporary detour from
my bank capital research and get to grips with it.
 After some further thought, I decided to write a book on
VaR, but had the handicaps of not being well up on
financial derivatives — a subject that figured
prominently in the emerging VaR literature — and of
having almost no experience of spreadsheets, which
were necessary for all but the most basic VaR
calculations. So before I could master VaR, I had to tool
up on financial derivatives and Excel, which I had been
wanting to do in any case.
RISK MANAGEMENT AND VAR:
A CURSORY OVERVIEW
 Having explained where I am coming from, I would now
like to say a little bit about the subject itself, and in
particular, about the importance of judgmental factors in
it. Of course, risk management is notorious for being
anything but transparent: many practitioners get high on
their mastery of difficult quantitative methods, weird
products, impenetrable derivatives terminology, bizarre
trading ritual, and other difficult subjects (derivatives
accounting, taxation and law, etc.).
 This is all well and good for the rocket scientists, and it
does have a grain of truth: you can rarely employ
someone straight off the street to come in and price your
exotic derivatives for you. However, this attitude
obscures the point that the value and success of
everything, the quants included, must ultimately depend
on judgement.
EPISTEMOLOGY AND METHODOLOGY
 Before discussing opportunities for qualitative research
in this area, I should come clean and explain where I
stand on the underlying epistemology. My position on
epistemology is basically practical we should use
whatever seems to work for the problem at hand, and we
should avoid excessive dogmatism: methodology is not
an exact science. I also believe that researchers should be
aware of the pitfalls to which their preferred
methodology might expose them, and also get some feel
for the epistemologies/ methodologies used by other
researchers so they have some idea where they might be
coming from.
SO WHAT ARE THE RELATIVE STRENGTHS AND
WEAKNESSES OF ALTERNATIVE APPROACHES?
 At the most simplistic level, the strength of
scientific/quantitative approaches is that they are
respectful of the notion of ‘truth’, in some sense of other,
but their weakness is the difficulty they have often have
handling consciousness, intention, and so on; the
social/qualitative approaches score the other way round.
OPPORTUNITIES FOR QUALITATIVE
RESEARCH IN FINANCE AND RISK
MANAGEMENT
 So, granted that quantitative and qualitative approaches
are each valid within their respective (but not mutually
exclusive!) domains, where are the opportunities to do
qualitative research in finance and risk management?
The answer is: everywhere.
 An excellent example of good qualitative research in this
area is an article by Chris Marshall and Michael Siegel,
published in the Journal of Derivatives in 1997. They set
out to examine the issue of implementation risk — the
risk of differences in risk estimates arising solely from
differences in the ways in which models were
commercially implemented.
 They did so by asking all the major vendors of VaR
models to provide VaR estimates for a set of pre-
specified positions, with follow-up discussions to
investigate any major discrepancies that came to light.
Their results were very interesting. They found that in no
case did any two systems’ implementations of the same
model produce precisely the same estimated VaR. They
also found that differences between VaR estimates could
be important, which suggests that a lot hinges on
‘details’ and ancillary decisions made by users and
developers.
CONCLUSIONS
 We all know that a great deal of research in this area is
highly ‘technical’, in one sense or other, and there is also
a huge amount of jargon, macho posturing, and other —
to use the economics jargon — barriers to entry. Leaving
aside the point that even the most obtuse technical work
is always underpinned by qualitative judgements of one
sort or another ( so the ‘quantitative vs. qualitative
debate’ is highly misleading), there is also much that can
only be properly investigated by traditional qualitative
methods.
THANK YOU ALL!