David X. Li

David X. Li is a Chinese-Canadian actuary who earned a PhD in statistics from the University of Waterloo. His 2000 paper "On Default Correlation: A Copula Function Approach" published in the Journal of Fixed Income introduced the Gaussian copula model for estimating the likelihood that multiple loans would default together. The formula provided a way to price complex structured products like collateralized debt obligations (CDOs) that previously had no tractable pricing model. Wall Street adopted the formula widely, using it to price mortgage-backed securities and CDOs during the housing bubble. However, the model assumed default correlations were stable over time — an assumption that proved catastrophically wrong during the 2008 financial crisis when mortgage defaults became highly correlated. An article in Wired magazine in 2009 called the formula "The Formula That Killed Wall Street." Li himself had warned that the model was being misapplied, but these warnings went largely unheeded. He later worked at Barclays Capital and then returned to China to work in insurance and financial regulation.