I wondered how a pool of bad mortgages when securitised got high rating? There is extensive academic knowledge available on framework and calculations to assess risk. Then where did they fail to assess the risk?
As I sought the answer, I stumbled on the following blog, thanks to my Finance professor.
http://finance.blogs.ie.edu/archives/2009/03/li-a-revolution-after-black-scholes-formula.php
The risk assessment model 'Normal Copula' which failed is not to be blamed though for the crisis. The academic world was aware of its limitations but Bankers still embraced it for its simplicity and potential to devise new trading instruments.
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