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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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Today’s forecast for U.S. Treasury yields is based on the May 27, 2010 constant maturity Treasury yields reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release reported at 4:15 pm May 28, 2010.  The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com

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In the classic 1939 film “Mr. Smith Goes to Washington,” the legendary Jimmy Stewart plays a naïve Westerner who was appointed U.S. Senator and then has to learn the realities of Washington the hard way.  What would have happened if Mr. Smith instead had gone to Wall Street today? This blog presents one possible script.
 

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Today’s forecast for U.S. Treasury yields is based on the May 19, 2010 constant maturity Treasury yields reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release reported at 4:15 pm May 20, 2010.  The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via info@kamakuraco.com.

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In Monday’s blog we talked about the natural bankers’ tendency to judge credit risk tools by how they do on firms, sovereigns or individuals who failed to pay.  How they performed on the best credits, those who did pay, gets short shrift.  Today’s blog talks about the real business costs of default models that have been inflated to make the default probabilities on the defaulters even higher, knowing that the credit analyst will ignore the inflated default probabilities on the non-defaulters. As we explained Monday, this is a common problem aggravated by the moral hazard of model builders who take advantage of this knowledge.

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One of the more curious human traits that affects credit modeling is the tendency of the user of a default model to look only at how the model works on firms or individuals that have defaulted, ignoring how the model works on non-defaulters.  This tendency can result in very serious errors in both model selection and in day to day business.  This post explains why and gives some examples.

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