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The default risk must be uncorrelated though or else you get no gains from diversification. This was a big part of how CDOs justified the security of a AAA tran
by formercoder 7y ago
The default risk must be uncorrelated though or else you get no gains from diversification. This was a big part of how CDOs justified the security of a AAA tranche, when in reality everything was correlated because bad loans were made to everyone.
- mikeash 7y agoFortunately, there’s no reason to ever expect that defaults would be correlated. There’s just no phenomenon that could cause it.