Posted via email from Mhm.
When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice. If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market. Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).
... "making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly." Isn't it even worse than this? If I'm a CDS trader making a buy/sell decision about Alice (a decision that will help set the price of the CDS), I am most likely trying to use all available information, including Britney's behavior, into account when deciding whether to transact at a given price. Critical to my accurately pricing the risk would be the correlation between Alice's and Britney's default risks. If I'm going to price the default risk correctly, I must have a good way of coming up with this correlation.
But if I have a good way of accurately determining this correlation, why in the world did we need Li's copula formula? It's circular: I need accurate correlations to correctly price default risk, and Li's formula needs accurately priced default risk to back out the correlations. How could the financial services industry rely on a method that required accurate correlation estimates to determine accurate correlation estimates? Is this as monumentally stupid as it sounds, or am I missing something?
Trying to Break Cycle, Wall Street Opens Higher
What? Who is trying to break the cycle? Why? This headline is totally meaningless. As the market has become more volatile, we are trying to assign its actions more meaning, now going so far as to personify it. Clear evidence that we're totally irrational -- the less information the market's movements provide, the more information we ascribe to them.
12 o'clock: Pittsford Mendon HIgh School
3 o'clock: Yale University/Calhoun College
6 o'clock: Yale School of Management
9 o'clock: Katzenbach
Go business school networking -- look how dense that cluster is.
At this point our economy is Tinkerbell. Let's all clap our hands to show that we do believe in wealth!
Photo: Courtesy of DC Comics
If you cried sacrilege when you found out that Watchmen director, Zack Snyder, had altered the ending of Alan Moore's graphic novel, just wait until you hear what else he's changed. The film screened for press in Los Angeles last night, and a source tells Defamer that the faraway glimpse of pantsless superhero Doctor Manhattan's blue wiener in an early preview has indeed made the final cut. In fact, the movie contains several shots of said wang — not that fans of the original comic would ever recognize it.
Says Defamer's tipster:
There is indeed shitloads of blue wang. And it's huge. In the comic book, it's very average, and uncut, but the film is completely the opposite. Massive and circumcised. Given that it's digital, was it [Billy] Crudup or his agent that insisted on the impressive cut cock?
In the graphic novel, Doctor Manhattan's peen is modest and understated (do a Google Image Search), symbolizing the character's impotence in the face of human evil. Adding inches to its length or circumference undermines everything Alan Moore was trying to say about politics, society, and the human condition. At this point, the best we can hope for is that Snyder was more faithful with respect to testicle size.
He could presumably take any physical form he'd like ... be happy it wasn't the World Trade Center.
But once the doors closed, the smooth-talking House Republican leader, John A. Boehner of Ohio, surprised many in the room by declaring that his caucus could not support the plan to allow the government to buy distressed mortgage assets from ailing financial companies.
Mr. Boehner pressed an alternative that involved a smaller role for the government, and Mr. McCain, whose support of the deal is critical if fellow Republicans are to sign on, declined to take a stand.
The meeting opened with Mr. Paulson, the chief architect of the bailout plan, “giving a status report on the condition of the market,” Tony Fratto, Mr. Bush’s deputy press secretary, said. Mr. Fratto said Mr. Paulson warned in particular of the tightening of credit markets overnight, adding, “that is something very much on his mind.”
Mr. McCain was at one end of the long conference table, Mr. Obama at the other, with the president and senior Congressional leaders between them. Participants said Mr. Obama peppered Mr. Paulson with questions, while Mr. McCain said little. Outside the West Wing, a huge crowd of reporters gathered in the driveway, anxiously awaiting an appearance by either presidential candidate, with expectations running high.
