Most analysis of the current financial crisis blames the use of “faulty models” in pricing derivatives, and this analysis is probably correct. Coval et al. [CJS09] give a readable account of this “modelling error”, and point out that buyer practices (and in particular the algorithms used by rating agencies [WA05]) do not involve bounding the lemon cost or doing any kind of sensitivity analysis of the derivative other than running Monte-Carlo simulations on a few industry-standard distributions such as the Gaussian copula.
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