Tuesday, August 19, 2008

Faulty premise at the heart of credit derivative mathematical model

"In 1997, nobody knew how to calculate default correlations with any precision. Mr. Li's solution drew inspiration from a concept in actuarial science known as the "broken heart": People tend to die faster after the death of a beloved spouse. Some of his colleagues from academia were working on a way to predict this death correlation, something quite useful to companies that sell life insurance and joint annuities."Suddenly I thought that the problem I was trying to solve was exactly like the problem these guys were trying to solve," says Mr. Li. "Default is like the death of a company, so we should model this the same way we model human life."

There are serious problems with this approach. First, the existence of a meaningful analogy between the relationship of a married couple and connections between complex legal/financial structures seems unlikely.

A related post: This is No Longer Funny...by Paul Wilmott.

Tuesday, August 12, 2008

US trade deficit

Interesting that the trade deficit ex-petroleum has been essentially in a range since mid-2004 until the recent sharp decrease. With respect to the entire time period shown on the chart, it is an illustration of the offshoring of manufacturing capacity from the US. (Source: CR)

Commercial structures a good place to put solar panels

In a piece titled Retailers Opt To Roll Their Own Power, Informationweek tells us that
"Cutting back on electricity use can trim a company's power bills only to a point. To really make a dent, businesses are beginning to generate their own juice to supplement what they buy off the grid. Some big-box retailers are doing it by erecting solar panels on their rooftops. Wal-Mart, Kohl's, Macy's, and WholeFoods are hurrying to make a Dec. 31 deadline to qualify for tax incentives"
Rooftops of big stores and warehouses are a very logical place to put solar panels; this is good news.