RM's+Wall+Street+Math+Formula

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This infamous formula, called the [|Gaussian cupola function] and developed by David Li, was used to model high risk in the financial risks and allowed the financial markets to expand exponentially. Li's formula utlizes data from credit default swaps to calculate default risk, rather than using historical data to predict it. Many people overlooked some of the assumptions it made because it was earning so many investors huge amounts of money. Below is a chart from WIRED magazine (online) that explains the formula.... > [The black chart on the page explains the breakdown of the formula in easy-to-understand terms :) ]
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People, in fact, had predicted that this formula would cause trouble in the future....investors were relying on house prices to continue to soar, and this assumption was one of many that led to the financial crisis. Because the formula relied on market data, many people cautioned that the relationships established in cupola fuction were not constant, but varying, or "mercurial." Therefore, the relationship established in the cupola function could be highly unpredictable.

If you want to know more about how math is involved in economics, please see the following links to .pdf files:


 * [|Math involved in cash flow streams, mortgages, etc]
 * [|Math and Bonds]
 * [|Math and Porfolios]