RISK MANAGEMENT AND VOLATILITY: How quantitative variables can increase risk taking behaviour and moral hazard across financial industry.

The choice of the subject of this master thesis is the ending step of a process of observation on the increasing weight gained by Risk Management departments on strategic management decision inside the Financial Industry, during these post-crisis years. Until 2008, Risk Management department inside the biggest investment banks and hedge funds was poorly considered and involved in the decision-making activity of them. To be even clearer, the Risk Management department of a bank was seen more as an obstacle then as an ally: in time of excitement, of high risks taken and high rewards, its alerts sounded as a disturbing noise on a triumphal parade. Whereas in time of huge losses, such as the time leading to 2008, it was appointed as the scapegoat and blamed for poor performance, even if in time of raising profit no one considered its advices. Due to this, the Risk Management department inside a bank were less appealing for the most brilliant profiles, who drove themselves to trading departments were they could be taken in more consideration and been more rewarded. The underperformance of this department became a trend and a de facto who no one had interest to improve. After 2008, as Governments directly took positions inside the management of the biggest bank both in USA as in Europe, and as a result of strict regulations released from Basel III, Risk Management department gained positions inside the ¿hierarchy¿ and became an important part of the investment strategy of big, medium and little banks. This internal management change needs to be seen not just as an operational one: it is a cultural development inside the financial industry and my master thesis scope of research lies in this final statement. I want to analyse to what extent quantitative variable as volatility, leading to a wrong perceptions of risk, could eventually increase risk-taking behaviour. Thanks to the introduction to the research of the Systemic Risk Centre of London School of Economics is shown the connection between volatility, human behaviour and financial crises, which is the final analysis of this master thesis. The second part of the work is based on the analysis of two case studies (Long-Term Capital Management and Lehman Brothers) as real proofs of SRC hypothesis and sound evidences of the relevance and seriousness to confer to risk management methods.