Lessons from the Financial Crisis
First published:
ISBN: 9781782720836
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A Practical Guide to Monte Carlo CVA
Introduction to 'Lessons from the Financial Crisis'
The Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can be Learned?
Underwriting versus Economy: A New Approach to Decomposing Mortgage Losses
The Shadow Banking System and Hyman Minsky’s Economic Journey
The Collapse of the Icelandic Banking System
The Quant Crunch Experience and the Future of Quantitative Investing
No Margin for Error: The Impact of the Credit Crisis on Derivatives Markets
The Re-Emergence of Distressed Exchanges in Corporate Restructurings
Modelling Systemic and Sovereign Risks
Measuring and Managing Risk in Innovative Financial Instruments
Forecasting Extreme Risk of Equity Portfolios with Fundamental Factors
Limits of Implied Credit Correlation Metrics Before and During the Crisis
Another view on the pricing of MBSs, CMOs and CDOs of ABS
Pricing of Credit Derivatives with and without Counterparty and Collateral Adjustments
A Practical Guide to Monte Carlo CVA
The Endogenous Dynamics of Markets: Price Impact, Feedback Loops and Instabilities
Market Panics: Correlation Dynamics, Dispersion and Tails
Financial Complexity and Systemic Stability in Trading Markets
The Martingale Theory of Bubbles: Implications for the Valuation of Derivatives and Detecting Bubbles
Managing through a Crisis: Practical Insights and Lessons Learned for Quantitatively Managed Equity Portfolios
Active Risk Management: A Credit Investor’s Perspective
Investment Strategy Returns: Volatility, Asymmetry, Fat Tails and the Nature of Alpha
The regulatory and internal requirement to measure counterparty risk pre-dates the financial crisis by many years. Most firms carrying derivatives books had the ability to compute counterparty exposures for their trades, and many had built sophisticated Monte Carlo systems to do so. The only thing that was missing was taking the possibility of default seriously. Because of the perceived low probability of default, enormous exposures were allowed to build up at some firms without raising any alarms. For the same reason, the information on exposures available to market participants prior to the crisis was often not used to mitigate counterparty risk despite the low cost of credit insurance in pre-crisis years.
The financial crisis brought new urgency to the efforts in implementing calculation of potential future exposure (PFE) and credit value adjustment (CVA). Having seen the default of Lehman Brothers, and near default of other firms, the market participants were for the first time taking seriously the risk of default and assigning a more realistic probability to it, as evidenced by the dramatic widening of credit spreads during and immediately after the crisis. The increased
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