"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.
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