Taylor Spears

The Formula That Killed Wall Street: The Gaussian Copula and Modelling Practices in Investment Banking

Drawing on documentary sources and 114 interviews with market participants, this and a companion article discuss the development and use in finance of the Gaussian copula family of models, which are employed to estimate the probability distribution of losses on a pool of loans or bonds, and which were centrally involved in the credit crisis. This article, which explores how and why the Gaussian copula family developed in the way it did, employs the concept of ‘evaluation culture’, a set of practices, preferences and beliefs concerning how to determine the economic value of financial instruments that is shared by members of multiple organizations. We identify an evaluation culture, dominant within the derivatives departments of investment banks, which we call the ‘culture of no-arbitrage modelling’, and explore its relation to the development of Gaussian copula models. The article suggests that two themes from the science and technology studies literature on models (modelling as ‘impure’ bricolage, and modelling as articulating with heterogeneous objectives and constraints) help elucidate the history of Gaussian copula models in finance.

'A device for being able to book P&L': the organizational embedding of the Gaussian copula.

This article, the second of two articles on the Gaussian copula family of models, discusses the attitude of ‘quants’ (modellers) to these models, showing that contrary to some accounts, those quants were not ‘model dopes’ who uncritically accepted the outputs of the models. Although sometimes highly critical of Gaussian copulas – even ‘othering’ them as not really being models – they nevertheless nearly all kept using them, an outcome we explain with reference to the embedding of these models in inter- and intra-organizational processes: communication, risk control and especially the setting of bonuses. The article also examines the role of Gaussian copula models in the 2007–2008 global crisis and in a 2005 episode known as ‘the correlation crisis’. We end with the speculation that all widely used derivatives models (and indeed the evaluation culture in which they are embedded) help generate inter-organizational co-ordination, and all that is special in this respect about the Gaussian copula is that its status as ‘other’ makes this role evident.

Phishing for Phools: The Economics of Manipulation & Deception

Economists and finance academics largely take as a matter of faith that market exchanges between consenting parties improve the well-being of both parties. Underlying this belief is the notion that...

Die kognitive Soziologie toxischer Vermögenswerte

Im Beitrag wird die historische Entwicklung der Evaluierungspraktiken und -dispositive zur Bewertung von hypothekenbesicherten Wertpapieren (MBSs) und besicherten Schuldverschreibungen (CDOs) untersucht, zwei inzwischen‚beruchtigten‘ Klassen von „toxischen“ Anlagen, die in der Kreditkrise 2008 eine zentrale Rolle spielten. Auf der Grundlage von Interviews mit 127 Marktanalysten, Quants, Handlern und Wissenschaftlern sowie einem grosen Korpus technischer Dokumente wird ausgefuhrt, dass diese beiden Anlageformen zwar strukturell ahnlich sind, derenGeschichte jedoch zu unterschiedlichen Bewertungspraktiken von Investoren und durch organisatorisch separierte Gruppen innerhalb der Ratingagenturen fuhrte. Als die Ratingagenturen diese beiden Praktiken zusammenfuhrten, um einen neuen hybriden finanziellen Vermogenswert - das ABS-CDOs - zu bewerten, haben sie in nicht-intendierter Form eine Arbitragemoglichkeit geschaffen, welche die Banken ausnutzten und die letztlich das gesamte Finanzsystem in Gefahr brachte. Durch die Verfolgung der Entwicklung der Praktiken, die zur Bewertung dieser Vermogenswerte und deren Auswirkungen auf die Makrookonomie verwendet werden, wird auch die Bedeutung des Dispositivkonzeptes fur das Studium der Evaluierungspraktiken und die Analyse von Markten sichtbar.