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An Introduction to Derivative Securities, Financial Markets, and Risk ManagementAdvanced Financial Risk Management, 2nd ed.

 Blog Entries

Kamakura Corporation Named to World Finance 100

September 13, 2014
Comparing the Marginal Cost of Funds for Berkshire Hathaway with BAC and WFC

September 11, 2014
Primary Mortgage Yields Rise 0.02% and 30 Year Fixed Rate Mortgage Servicing Values Rise 0.13% This Week

September 10, 2014
Bank of America: A Pre-Stress Test Credit Risk Report Shows Dramatic Progress

September 9, 2014
Bank of America and Its High Marginal Cost of Funds

September 8, 2014
Royal Dutch Shell Bond Issue Leads the 20 Best Value Bond Trades with Maturities of 1 Year or More

September 4, 2014
Forward 1 Month T-bill Curve Twists, Jumps 0.16% to Peak at 3.33% in February, 2021

August 26, 2014
Transfer Pricing and Valuation Yield Curves without Swap Data: A KeyBank and KeyCorp Example

August 18, 2014
More Evidence on the Funding “Subsidy” of the Too Big to Fail Banks

August 14, 2014
Mortgage Servicing Rights Values Close Mixed for the Week as Current and Forward Mortgage Rates Drop 0.03%

August 13, 2014
Liquidity At Risk – A stochastic look at cashflows

August 12, 2014
Five of Seven Regional Banks Trade at Credit Spreads Better than the Too Big to Fail Banks

August 12, 2014
Kinder Morgan Energy Partners Leads the 20 Best Value Bond Trades with Maturities of 10 Years or More

August 11, 2014
Measuring the Funding Costs of the Too Big to Fail Banks:
The U.S. Dollar Cost of Funds Index™

August 6, 2014
Credit Spreads and Default Probabilities: A Simple Model Validation Example

August 5, 2014
Vodafone Group PLC: Default Risk is Down Sharply But Value Ranks in the Bottom 10% of Bonds

July 15, 2014
Brazil, Italy, Spain, Credit Default Swaps and the
European Commission Short Sale Ban, 2010-2014



Kamakura Blog


In the mid 1980s at First Interstate, I participated in serious discussions about how the Merton model of risky debt could be used to diversify credit risk. In the early 1990s, I actively marketed default probabilities based on the Merton concept in Japan. I wrote two books advocating the model in the 1990s as well. Now my view of the model has completely changed. This blog explains how and why that came about.

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Much of today’s credit crisis can be blamed on mortgage structures where the lender hoped, but had no reason to believe, that losses would be manageable. This blog talks about what changes are needed in “common practice” default modeling to achieve “best practice” in both the short and long term.

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Last week on July 22 and 23, our blog post focused on the issue of which government rescues should constitute a "failed" firm for default modeling and which should not. The view of most of our clients is that FNMA and FHLMC are clear fails, while the rating agencies and a few clients say they are not. The choice one makes has big implications for the accuracy of default modeling. This post shows why.

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Yesterday's blog post on the need to audit rating agencies' self-assessments on ratings accuracy has provoked a lot of comments.  What do you think should be done in the KRIS version 5.0 credit modeling exercise with respect to FNMA and FHLMC? 

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The U.S. Treasury proposed new regulations on the major rating agencies yesterday, and a chorus of critics have attacked the agencies for inaccuracy of both structured products and corporate ratings over the last two years.  One of my great fears has been the moral hazard that the rating agencies have to exaggerate the accuracy of their historical performance in rating corporate bonds.  Today, those fears were realized.  The U.S. Treasury should require an independent audit of rating agency performance in rating bonds and structured products.  This post explains why.

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