False Assumption 3: The system of Gaussian copula function was adequate and reduced risk of MBS.
August 11th, 2009 | Published in Housing Market
The Gaussian copula function, developed in early 2000s by the mathematician David Li, appeared for many financial institutions as an excellent tool to standardize and simplify the risk assessment process. This regression model allowed for complex risks to be modeled into a simple function that made it easy for credit analysts to determine the risk in a pool of securities. Adopted by credit rating agencies and even regulators, the model quickly became widespread. However, the simplification of the conventional due diligence process ignored various risks inherent in the securities. These risks accumulated over time and consequently lead to the greatest financial meltdown in the modern history.
For those who want more detailed analysis, a good article on this is at Wired Magazine. http://www.wired.com/techbiz/it/magazine/17-03/wp_quant?currentPage=all
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