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Finance, Economics, and Mathematics by Robert C. Merton, Oldrich A. Vasicek

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Chapter 3One-on-One Interview with Oldrich Alfons Vasicek

By Nina Mehta

Financial Engineering News, May 2005

Oldrich Alfons Vasicek, a mathematician, is one of the leading lights in modern finance. His 1977 paper, “An Equilibrium Characterization of the Term Structure,” described the behavior of interest rates across maturities and paved the way for the development of the interest rate derivatives market. He is one of the co-founders of KMV Corp., the granddaddy of credit risk modeling firms, which Moody's Investors Service bought in 2002 (and renamed Moody's KMV). Throughout his career Vasicek has been at the forefront of credit risk modeling. Earlier this year he increased his stockpile of awards when he was named the 2004 IAFE/SunGard Financial Engineer of the Year. The author of more than 30 papers in mathematical and finance journals, Vasicek received a PhD in probability theory from Charles University in Prague, in what is now the Czech Republic, in 1968. This interview was conducted in February.

FEN:

You've worked on models to value credit risk for a large part of your career, but you said recently that valuing the plain debt of a single issuer is more challenging. Why?

Oldrich Vasicek:

It's a very basic question we need to ask and answer with a higher priority than asking how the derivatives are priced. Derivatives are secondary instruments. I'm not a great fan of so-called reduced-form models, which assume you know how to price debt—namely, that you observe the market ...

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