Nomura finds limitations in Monte Carlo

Nomura Securities released a study this morning on the unquantifiable correlation risk particularly associated with assets that are not modeled using actuarial methods. In the piece, headlined What a Coincidence?, Nomura urges investors to tread cautiously into securitizations backed by these assets, such as CDOs, aircraft ABS and franchise loan ABS, all of which have suffered severed ratings volatility over the past few years.

Logically, CDOs backed by these types of deals have been hit hardest, as they feature two layers of this “model risk,” as Nomura coins it.