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Did Black-Scholes Cause the Housing ...   London House Price Datapoint of the Day
Feb 19 2008 2:23PM EST

When the Markets are Wrong

The markets don't always make any sense, and this headline from Bloomberg gives a prime example:

Northern Rock Credit-Default Swaps Rise on Nationalization

Yes, in the wake of the news that the Northern Rock was going to be owned by the UK government with its risk-free credit rating, the price to protect against default on Rock bonds jumped to 295 basis points. To her credit, the reporter, Abigail Moses, didn't even attempt to come up with some spurious ex-post reason why that should be the case.

Inevitably, the swaps have now tightened, as you'd expect, moving down to 160bp. But let this be a lesson to anybody who likes to look to market reaction to real-world events: sometimes the market is just plain wrong.

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