Comments on: Credit models get even more complicated http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Harry Seldon http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/comment-page-1/#comment-6728 Sat, 12 Sep 2009 12:05:14 +0000 http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/#comment-6728 “seems to accept as an article of faith that the problem with credit risk models was that they weren’t sophisticated and complicated enough.”

This freakes me out. Looks like people do not understand that complexity generates chaos. Conversely, to fight chaotic behaviour one needs regulation and simplicity…

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By: David Harper http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/comment-page-1/#comment-5364 Tue, 11 Aug 2009 20:28:01 +0000 http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/#comment-5364 Read it last night. Turns out to be a nicely-written & succinct primer on the state of credit risk models; including highlighting drawbacks (e.g., Gaussian copula).

highlights @ http://www.bionicturtle.com/learn/articl e/imf_on_recent_advances_in_credit_risk_ modeling_credit/

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By: Don the libertarian Democrat http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/comment-page-1/#comment-5344 Tue, 11 Aug 2009 16:17:47 +0000 http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/#comment-5344 By the way, when I say that these models can be interesting, I’m referring to this paper by Li especially:

http://www.defaultrisk.com/_pdf6j4/On%20 Default%20Correlation-%20A%20Copula%20Fu nction%20Approach.pdf

Here’s the point:

“There exist three methods to obtain the term structure of default rates:
(i) Obtaining historical default information from rating agencies;
(ii) Taking the Merton option theoretical approach;
(iii) Taking the implied approach using market prices of defaultable bonds or asset swap spreads.”

It strikes me that looking at these products and risks through these various methods can be quite interesting, even if dubious for actual investing.

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By: Ken http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/comment-page-1/#comment-5336 Tue, 11 Aug 2009 13:54:25 +0000 http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/#comment-5336 I keep reading that quote in the update, and failing to understand. It seems to be saying “We can do better at causing widespread disaster,” but that makes no sense at all. Are they perhaps pointing out that the downside effects of the algorithms also have to be taken into account?

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By: Ken http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/comment-page-1/#comment-5335 Tue, 11 Aug 2009 13:49:28 +0000 http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/#comment-5335 Felix, an interesting perspective on this dilemma may come from the hard sciences. Regulators were designed and commissioned to regulate the activities of relatively benign financial institutions, with tools more akin to Newtonian physics than the Quantum Calculus that now seems to be required.

Management must seek to understand the implications of their decisions. When a portfolio consists of 6,000-10,000 loans, that is one thing – mundane, predictable, and “modelable.” However, when the portfolio and securitizations and hedges value at 1,000 or 10,000 times the size of that “Newtonian” portfolio, something changes in the game. A model can predict behavior, but it will, under no circumstances, provide any more clarity than Newtonian calculus in an Einsteinian context.

Just a thought, but perhaps we had best prepare ourselves for the contingency that behemoth banking is simply beyond prudent capability – I am not saying we can’t do it, we clearly are doing it – rather I am saying that it isn’t a good idea, systemically.

Limitations. We have them.

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By: Dan http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/comment-page-1/#comment-5324 Tue, 11 Aug 2009 10:18:29 +0000 http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/#comment-5324 The math allows us to deceive ourselves and pretend to know much more than we do.

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By: Luis Enrique http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/comment-page-1/#comment-5323 Tue, 11 Aug 2009 08:38:28 +0000 http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/#comment-5323 right. on the other hand, modeling risk isn’t a complete waste of time, and I’d rather have models that incorporate “contagion in the network” than not. What you make of these models, is another matter.

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By: dsquared http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/comment-page-1/#comment-5319 Tue, 11 Aug 2009 06:49:03 +0000 http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/#comment-5319 William: tell me more about this “understanding the company you are lending to” idea of yours; I believe that it may have applications to equity investment.

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By: The Scientician http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/comment-page-1/#comment-5315 Tue, 11 Aug 2009 04:22:34 +0000 http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/#comment-5315 This is another alarming sign that the Panglossian paradigm of efficient markets and the magic equations that describe them have survived the Great Recession. Indeed, the hydra has grown additional heads, or at least terms…

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By: Doug http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/comment-page-1/#comment-5312 Tue, 11 Aug 2009 03:04:05 +0000 http://blogs.reuters.com/felix-salmon/2009/08/10/credit-models-get-even-more-complicated/#comment-5312 Who needs these fancy credit models when internet aggregators can provide you with a free credit score

Oops – sorry wrong thread.

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