Extremely Ancient History, I Think They Were Using Clams As Currency

I’m pretty sure you’ve been wondering what the Wall Street Journal was saying about the Gaussian Copula back in 2005, right? That being the case, I have just the essay for you: Slices of Risk.

Note that there’s no mention of housing anywhere in the article.  The worry of the day stemmed from GM & Ford having their debt downgraded independently of other corporate bonds.  If I read things correctly, what lost people tons of money in 2005 was in some ways the opposite of the bursting housing bubble.  In the housing case, the models tended to assume that there would be low correlations between mortgage based securities going bad, whereas in the 2005 bond based case, they expect high correlations.  But be warned: one thing I’ve never said is “I truly understand the world of financial derivatives.”†

† As proof, I’m not even sure what the extension of ‘financial derivatives’ is. For all I know, there’s a different name for the things I’m currently discussing.  Crazy, huh?


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