A recent study by Fitch Ratings found that, during periods of market stress, defaults tend to cluster, asset correlations increase and loss rates exceed historical means. But what is the real connection between economic downturn conditions and asset correlations? Dr. Marco Folpmers and Peter de Rijke break down the market ... click here for more details.

Is the current financial crisis the result of model meltdowns or model misuse? Have we placed too much trust in model stability and too little emphasis on stress testing and validation of models, while failing to realize their limitations? Dr. Sebastian Fritz and Jörg Erlebach discuss the evolution of risk ... click here for more details.

Recently, academics have written papers on a variety of topical issues, including the pros and cons of diversification, the causes of the global credit crisis and the best methods for determining the spreads for credit default swaps. Til Schuermann and Peter Tufano summarize the main points of these papers, and ... click here for more details.

Is it possible to use a one-factor copula model to estimate loss distribution for homogeneous collateralized debt obligations (CDOs)? And what’s the real objective of such a model? Prashant Goyal answers these questions and explains how to use Monte Carlo simulations and MS Excel VBA software to calculate loss distribution ... click here for more details.

In Islamic banking, management of operational risk has become a priority. However, because of the unique laws they follow and the unconventional modes of financing they use, Islamic banks must hurdle significant operational risk obstacles. Horst Simon explores these challenges and explains how operational risk management in Islamic banking measures ... click here for more details.

Steve Xia critiques Tom Miller’s Introduction to Option-Adjusted Spread Analysis.

Dynamic hedging is one of the most widely used approaches for managing risk exposures. This method of hedging, however, seems to be neither accurate nor reliable during periods of significant market turbulence and illiquidity (e.g., the current credit crunch). Professor Mark Salmon and Dr. Stephen Weston probe the flaws of ... click here for more details.

EDITOR’S LETTER