Copula

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WIRED MAGAZINE: 17.03
Tech plot  :  IT  
Recipe for Disaster: The Formula That Killed Wall Street
By Felix pink-orange 02.23.09

In the mid-80s, Wall Street turned to the quantsâ€"brainy pecuniary engineersâ€"to invent new ways to boost profits. Their regularitys for minting m acey worked brilliantly... until one of them devastated the global economy.
Photo: Jim Krantz/Gallery Stock
A yr ago, it was hardly unthinkable that a math wizard wish well David X. Li might someday earn a Nobel Prize. subsequently all, financial economistsâ€"even Wall Street quantsâ€"have veritable the Nobel in economics before, and Lis work on measuring risk of infection has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors keep abreast the wreckage of the biggest financial meltdown since the Great Depression, Li is probably grateful he still has a job in pay at all. Not that his achievement should be dismissed. He took a notoriously tough nutâ€"determining correlation, or how on the face of it disparate events are relatedâ€"and cracked it wide break with a simple and elegant mathematical formula, one that would set about ubiquitous in finance worldwide.




For five years, Lis formula, known as a Gaussian copula function, looked like an unambiguously confirmative breakthrough, a piece of financial technology that allowed hugely compound risks to be modeled with more ease and accuracy than incessantly before. With his brilliant spark of mathematical legerdemain, Li made it affirmable for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenchedâ€"and was making people so untold moneyâ€"that warnings about its limitations were largely ignored.
Then the model miss apart. Cracks started appearing early on, when financial markets...If you want to get a full essay, order it on our website: Ordercustompaper.com



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