The formula that killed Wall Street

Wired magazine is running a piece by Felix Salmon (a prolific financial blogger) on the Gaussian Copula. It is not a new position in the Kamasutra. It is a formula created by a quant known as David Li. It became one of the central underpinnings of measuring the risk of a security by looking at the correlation of the underlying securities (coupling of instruments, hence the name). The article explains how Wall Street embraced the formula, and used it like water without fully understanding its merits and demerits. The formula was flawed. Its usage even more so.

If all of this had worked, David Li might have been on the rolls for a Nobel. As of now, he is in China and working quietly for a local company.

Recipe for Disaster: The Formula That Killed Wall Street

Advertisements