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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Corporation
2222 Kalakaua Avenue

Suite 1400
Honolulu HI 96815

Phone: 808.791.9888
Fax: 808.791.9898
info@kamakuraco.com

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Our blog post on September 23, 2009 was an update of a 2007 article we did in RISK on the relationship between credit default swap quotes and modern reduced form default probabilities.  This post illustrates how the probability of government bailouts causes the potential losses of different liability holders to diverge sharply.  A similar kind of division can be seen in the trends of default probabilities and credit default swaps.  We illustrate this process using the cases of FNMA and Citigroup.

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On September 11, the Australian Prudential Regulation Authority released its discussion paper on liquidity risk regulations for authorized deposit-taking institutions in Australia.  This thoughtful paper highlights a key issue in liquidity risk management that has been important in the current 2007-2009 credit crisis.  “Core deposits,” demand and savings deposits from individual investors and small businesses, are “not core”—they run off in a crisis.  This post combines those insights from the APRA paper with real data from the current credit crisis.

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One of the key questions policy makers have to answer about the “too big to fail” doctrine in financial services is “How big a mess do we have to clean up if we allow failure?”  Most commentators have focused on the consequences of preventing failure.  In this post, we focus on the consequences of allowing failure.  Thanks to Karen Brettell at Thomson Reuters, we list the largest claims filed as of today against Lehman Brothers.  To do your own search, see www.lehman-docket.com.

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Our April 19, 2009 blog post “Modeling Default for Credit Portfolio Management and CDO Valuation: A Menu of Alternatives” outlined a number of different ways in which one can model default among many counterparties, from retail to corporate to sovereigns, in a correlated way.  The most modern technology for doing this is the reduced form modeling technique first introduced by Robert Jarrow and Stuart Turnbull in 1995.  This blog provides a simple worked example of how to simulate default probabilities forward in a correlated way using two counterparties and three macro factors.

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It was announced today that Thomson Reuters and Kamakura will begin comparing credit default swap spreads and default probabilities on a daily basis on the Thomson Reuters 3000Xtra service. This blog supplements our March 18, 2009 blog entry and our paper in RISK (September 2007) on the relationship between CDS spreads and default probabilities. This blog post argues that corporate credit spreads, as measured in the credit default swap market, depend not only on expected losses but also on market liquidity, institutional restrictions, and market frictions. The difference is a credit risk premium. This credit risk premium is justified theoretically using a simple economic model, and this credit risk premium is validated empirically using credit default swap spreads.&a

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