SAS: Three lessons learned from the model that almost killed Wall Street!

Back in 2000, David X. Li (then a quant at AXA Financial), developed an asset default correlation model using a simple and elegant approach. It was considered a breakthrough. Everyone was using it - from bond investors and Wall Street banks to ratings agencies and regulators. Traders and brokers were quoting prices for bonds based on correlations calculated by this model. Li’s model was so widely used that no one thought to ask about any associated risks.

Then the financial markets began to

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