Daníelsson, J. (2002). The emperor has no clothes: Limits to risk modelling. Journal of Banking and Finance 26, 1273–1296. winner of the Iddo Sarnat award 2003 for the best paper in the journal in year 2002.

This paper considers the properties of risk measures, primarily Value--at--Risk (VaR), from both internal and external (regulatory) points of view. It is argued that since market data is endogenous to market behavior, statistical analysis made in times of stability does not provide much guidance in times of crisis. In an extensive survey across data classes and risk models, the empirical properties of current risk forecasting models are found to be lacking in robustness while being excessively volatile. For regulatory use, the VaR measure may give misleading information about risk, and in some cases may actually increase both idiosyncratic and systemic risk.