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allodial
03-15-15, 05:20 AM
NOTE: What the MSM probably didn't tell you is that brokerages and financial institutions started using this untested formula on the wide and it was highly untested. The formula was allegedly created by David Li when he worked for CIBC (Canadian financial institution). He goes over to JP Morgan, Citigroup then Barclays and ultimately heads back to China where he works for a Chinese financial institution. Next thing: XHTF... or something like that. He basically planted a mental trojan horse and XHTF. Another thing, the Li family name is associated with old school Chinese money and power.

Using this formula they created an oversold market. The formula was known to have flaws. Li and possibly others suggested that incorporating historical records in analysis wasn't necessary with the forumal so..they went forward with a vengeance. And the bubble burst...bailout. Surprise? It smells 100% of semi-silent warfare. Perhaps the formula or charlantry, if any, appealed to an already existing systemic greed?

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(Why does this smell a lot like bitcoin?)

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Is that what Kim Jong is laughing about?


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A Recipe for Disaster: The Formula That Killed Wall Street
A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
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The Gaussian copula function is a standard statistical technique. But in 2000, a numbers guy at JP Morgan Chase tricked it out as a quick and dirty way to quantify risk in very complex financial instruments. And, since the blame game is more delicious when personalized, that man was David X. Li, who came to the U.S. from China after earning a Ph.D in statistics in Canada.

Mr. Li’s copula function rummages around in a lot of individual debt securities and then pops out one number that gives the probability of the securities all going bad at once. If the default correlation among the securities is low (meaning they aren’t dependent, or related, to one another) then a low number pops out which means, presumably, the pool carries a low risk.

Sounds good, eh? But, even better, Mr. Li discovered a clever way to come up with the default correlation. The usual practice to determine default probability was to engage in a mind-numbing gathering of historical data on actual defaults. But Mr. Li cut that corner by using prices for credit default swaps as a proxy for the actual data. [Source: Forbes (http://www.forbes.com/2009/05/07/gaussian-copula-david-x-li-opinions-columnists-risk-debt.html)]


Li was born as Li Xianglin and raised in a rural part of China during the 1960s; his family had been relocated during the Cultural Revolution to a rural village in southern China for "re-education". Li was talented and with hard work he received a master's degree in economics from Nankai University, one of the country’s most prestigious universities. After leaving China in 1987 at the behest of the Chinese government to learn more about capitalism from the west, he earned an MBA from Laval University in Quebec, and an MMath in Actuarial Science and PhD in statistics from the University of Waterloo in Ontario in 1995 with thesis title An estimating function approach to credibility theory under the supervision of Harry H. Panjer. At this point he changed his name to David X. Li. His financial career began in 1997 at Canadian Imperial Bank of Commerce World Markets division. He eventually moved to New York City and in 2000, he was a partner in J.P. Morgan's RiskMetrics unit. By 2003 he was director and global head of credit derivatives research at Citigroup. In 2004 he moved to Barclays Capital and headed up the credit quantitative analytics team. In 2008 Li moved to Beijing where he works for China International Capital Corporation as head of the risk management department. (From Wikipedia (http://en.wikipedia.org/wiki/David_X._Li))


Related:

Taylor Effect (http://radhakrishna.typepad.com/rks_musings/2009/04/)
On Default Correlation: A Copula Function Approach (David X. Li) (April 2000 draft of 1997 working paper) (http://cyrusfarivar.com/docs/li.defaultcorrelation.pdf)
Formula From Hell (http://www.forbes.com/2009/05/07/gaussian-copula-david-x-li-opinions-columnists-risk-debt.html)
Collateralized debt obligation (http://en.wikipedia.org/wiki/Collateralized_debt_obligation)
The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It (http://www.amazon.com/The-Quants-Whizzes-Conquered-Destroyed/dp/0307453383)

edward222
04-24-15, 09:07 AM
Whats the name of that person who crash the stocks?

David Merrill
04-24-15, 01:38 PM
Interesting!

The mind bomb seems to be instilling confidence in transactions.

allodial
04-24-15, 09:30 PM
Whats the name of that person who crash the stocks?

David Li created the algorith/mind bomb but it took insiders to perpetrate spread the virus. Bitcoin has similar 'mysterious' origins.


Interesting!

The mind bomb seems to be instilling confidence in transactions.

I suppose that in "the hood", mind bombs are called "long game" or "short game" (http://en.wikipedia.org/wiki/Confidence_trick#Short_and_long_cons) depending on how long it takes the con to play out. Deep pockets tend to be associated with "long game" and so do bigger cons. Its uncanny how British/Old english terms and idioms still live on in "the hood".

edward222
04-27-15, 07:09 AM
David Li created the algorith/mind bomb but it took insiders to perpetrate spread the virus. Bitcoin has similar 'mysterious' origins.


That man is a genius :) .
His on the jail right now?
or the government hired him?

allodial
04-27-15, 07:58 AM
He used to work for China International Capital Corporation (http://en.wikipedia.org/wiki/China_International_Capital_Corp) (Beijing) as head of the risk management department. According to his Linked In page (https://www.linkedin.com/pub/david-x-li/7/4a0/86)he now works for AIG in New York.

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