Explain the term copula in current financial crisis

Question

Explain the term copula in current financial crisis.

Answer 1

The copula approach permits one to join together (hence the word ‘copula’) default models for individual companies within isolation to make a model for the probabilities of their joint default. The concept was adopted universally as a practical solution to a complicated problem. Though, with the recent financial crisis the concept has come in for lots of criticism.