Looking back at some of the financial events of the past year or so, I recalled this article from Wired which dicusses the  Gaussian copula function, a formula which is used to price CDO's. The article shows that one should look quite deeply into the underlying data rather than look only at a correlation between to pools. As the article notes, we have to understand the reality that the numbers we see represent. That's why I like working at the street level too. Mathematics for the sake of mathematics is just a puzzle for enjoyment. Pretty interesting history.

On a further note regarding the ABX, an index that tracks credit default swaps, a recent article shows that the ABX predicts greater losses than what are realized in the securities. The authors imply that the index is imperfect for marking-to-market mortgage portfolios. The article can be found here. Its a pretty big bite of technical sandwich so fill the coffee pot. As accounting rules change, this could be a bigger deal.