Monday, December 28, 2009

Why CDO's Can't be Priced

Paper of the day:

Computational Complexity and Information Asymmetry in Financial Products Arora, et al.

via Felix. Interesting passage from his commentary:
...the solution to model risk isn’t more complex models, its less reliance on models altogether. And anybody who applied a simple smell test to the mortgages underlying the CDOs in question — rather than deciding instead to trust various quants both in-house and at the ratings agencies — would have come to the right conclusion without any computing power at all.
In other words, strategic thinking beats statistical thinking here too.

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