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Default Correllation Matrix

Posted: September 15th, 2008, 10:49 pm
by GeneralDude
I have heard that this has really been the root of the cause of the CDO crisis. Of course it is a large and complex problem, but the main cause was that the traders or people in structuring, simply underestimated this facet of pricing the CDOs. True?

Default Correllation Matrix

Posted: September 15th, 2008, 10:57 pm
by TraderJoe
This has been said before, but is worth repeating. This has nothing to do with math(s) and everything to do with greed.

Default Correllation Matrix

Posted: September 15th, 2008, 11:03 pm
by GeneralDude
So I take it as a no? They were obviously grossly mispriced by the quants, why did these idiots hold on to them if they weren't? I do understand the idea of wanting big bonuses, but that doesn't explain the lack of oversight.But back to my point, was the correlation between defaults in the same CDO underestimated? Causing both a mispricing and a undervalue of risk?

Default Correllation Matrix

Posted: September 15th, 2008, 11:07 pm
by TraderJoe
Listen, if you start out with toxic waste, you're going to end up with toxic waste. Maths doesn't transform one thing into another, it merely quantifies. Now, back to your question on correlation...

Default Correllation Matrix

Posted: September 16th, 2008, 12:33 am
by attesaarela
I'm not actually involved in this, but the correlation structure is really hard to actually model I'd guess..Maybe the models should include eg the real estate market as an underlying variable..and maybe other macroeconomic variables too, but (I would imagine) it'd really be difficult.