– Quantifi survey of credit derivatives industry participants shows widespread failure of simple Gaussian copula models
– Majority of respondents believe independent models to be crucial in light of market turmoil
Quantifi, a leading provider of analytics and risk management solutions to the global credit markets, announced today the findings from the firm’s recent survey of credit derivatives industry participants. The survey included respondents from leading banks, asset managers, hedge funds, and other financial institutions.
The survey found that 75% of respondents had experienced difficulties with simple Gaussian copula models, in light of recent market conditions. In addition, because of the current market turmoil, the majority of survey respondents believed that independent models were very important if not crucial.
"The credit derivatives market is undergoing enormous change," says Rohan Douglas, ceo of Quantifi. "Widening spreads and market volatility are putting heavy strains on financial institutions’ existing models. Because standard Gaussian models cannot cope with current market conditions, firms are increasingly interested in correlated recoverymodels, which we recently introduced to our clients. Now, more than ever, we encourage firms to carefully examine the merit of independent models and alternative modelling techniques, so that they can better hedge and manage their risk exposure."
The survey was conducted at Quantifi’s recent seminar, titled ""CDO Modeling – Trends and Latest Developments." Held on November 19th in London, the seminar aimed to inform Quantifi clients and other credit derivatives industry participants of the most recent trends in modelling CDOs, including an overview of correlated recovery models. In September 2008, Quantifi introduced a new correlated recovery model, allowing calibration to a wider range of tranche prices than the traditional one-factor Gaussian copula model. This innovative new model allows participants to calibrate and price even during periods of extreme market turmoil.
John Peck, head of Quantifi’s EMEA Operations, comments, "Our survey findings point toward an increasing need for improved modelling techniques. At Quantifi, we are laser focused on identifying the market’s challenges and providing our clients with solutions for these challenges. We will continue to offer regular seminars for our clients, with a view toward educating them on the most cutting-edge models and valuation practices. We are dedicated to bringing best practices to the credit derivatives industry."
