David X. Li is a quantitative analyst and a qualified actuary who pioneered the use of Gaussian copula models for the pricing of collateralized debt obligations (CDOs).[1][2]
Li grew up in rural China in the 1960s.[1] He received a master's degree in economics from Nankai University before leaving China to earn an MBA from Laval University in Quebec.[1] He then received a master's in actuarial science and a PhD in statistics from the University of Waterloo in Ontario.[1] His financial career began in 1997 at Canadian Imperial Bank of Commerce.[1] In 2004 he moved to Barclays Capitalwhere he worked on rebuilding its quantitative analytics team.[1]
In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach."[2] This was the first appearance of the Gaussian copula which quickly became a tool for financial institutions to correlate associations between multiple securities.[1] This allowed for CDOs to be accurately priced for a wide range of investments that were previously too complex to price, such as mortgages. However in the aftermath of the Global financial crisis of 2008–2009 the model has been seen as fundamentally flawed and a "recipe for disaster".[1] According to Nassim Nicholas Taleb, "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked. Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism."[1] Li himself always understood the limitation of his model, in 2005 saying "Very few people understand the essence of the model."[3] Kai Gilkes of the credit research firm CreditSights says "Li can't be blamed", although he invented the model, it was the bankers who misinterpreted it.[1]
In 2008 Li moved to Bejing where he works for China International Capital Corporation as head of the risk-management department"
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