The role of naked credit default swaps in the global crisis is an ongoing source of controversy. This column seeks to add some formal analysis to the debate. Its model finds that speculative side bets can have significant effects on economic fundamentals, including the terms of financing, the likelihood of default, and the scale and composition of investment expenditures.
Stock investor response to the financial crisis indicates an expectation of lowered future corporate earnings. Historic relations between valuation of stocks and bonds are not the same post crisis as they have been in the preceding decades.
This is a discussion of some of the basic concepts of correlation. It is written to provide a background reference to articles written and to be written analyzing various economic and financial relationships.