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Gambling on Monte Carlo simulations
FT Alphaville —
... of loans to be purchased for the package. The firm enters data into a software program, which calculates the probability that a CDO’s assets will default in hypothetical situations of financial and commercial stress. The program effectively rolls the dice more than 100,000 times by running the information randomly. If the inputs and assumptions are wrong then the Monte Carlo simulations will be of very little use. In that sense they’re very similar to the magic worked by David Li’s Gaussian Copula . They give a false sense of security. And that’s precisely, some might argue, ...
Monday Links
Alea —
Of couples and copulas. Sam Jones on the formula that allegedly killed the world
MacKenzie on the Single-Factor Gaussian Copula Model
How the Gaussian copula got adopted
‘Race to Bottom’ at Moody’s, S&P Secured Subprime’s Boom, Bust
Facts belie the diagnosis on credit derivatives
ISDA Margin Survey 2009
Alternative compounding methods for over-the-counter ...
Calpers vs Credit Ratings
FT Alphaville —
... Those ratings, according to the lawsuit, “ultimately proved to be wildly inaccurate and unreasonably high.” Here’s some detail on what Calpers alleges to have happened: [image] The complaint goes on to claim that the agencies used flawed tests when rating the three SIVs, using scenarios that did not account for the possibility the SIVs would be unable to liquidate the assets in their portfolios. Calpers also alleges the asset correlations used by the agencies (possibly some sort of stochastic formula ) that didn’t capture the whole risk of the SIVs given that they held lots ...
Chasing the fat tail
FT Alphaville —
... equity returns. But tweaking the tails does not matter nearly as much, in the long run, as centering the distribution of returns about a reasonable expected mean . Whatever the details of SoFIE, this is an interesting example of the kinds of the things people are doing in their attempt to build better models. Be comforted or be scared. Related links: Gambling on Monte Carlo simulations - FT Alphaville Finance and Monte Carlo simulation - Journal of Financial Planning Of couples and copulas - FT
