6 ms·
The Black-Scholes equation
- giardini 18y agoReaders might be interested in Nicholas Nassim Taleb's paper "Why We Have Never Used the Black-Scholes-Merton Option Pricing Formula" available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1012075 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1012075 from the abstract: "we have historical evidence that 1) Black, Scholes and Merton did not invent any formula, just found an argument to make a well known (and used) formula compatible with the economics establishment, by removing the "risk" parameter through "dynamic hedging", 2) Option traders use (and evidently have used since 1902) heuristics and tricks more compatible with the previous versions of the formula of Louis Bachelier and Edward O. Thorp (that allow a broad choice of probability distributions) and removed the risk parameter by using put-call parity. 3) Option traders did not use formulas after 1973 but continued their bottom-up heuristics. The Bachelier-Thorp approach is more robust (among other things) to the high impact rare event. The paper draws on historical trading methods and 19th and early 20th century references ignored by the finance literature. It is time to stop calling the formula by the wrong name." An excellent summation of Taleb's critique is "Whither Black-Scholes?"" http://www.forbes.com/2008/04/07/black-scholes-options-oped-cx_ptp_0408black.html http://www.forbes.com/2008/04/07/black-scholes-options-oped-...
- j2d2 18y agoReaders would also enjoy the story of LTCM. http://en.wikipedia.org/wiki/Long-Term_Capital_Management http://en.wikipedia.org/wiki/Long-Term_Capital_Management
- chollida1 18y agoThough they worked in bond arbitrage and didn't use Black Scholes:)
- steveplace 18y agoThey used options on bonds. High leverage + quant statistical method + six sigma event = fun.
- j2d2 18y agoMyron Scholes worked for them...
- logjam 18y agoHere's an alternative equation: bet on yourself, instead of on whether millions of others will succeed or fail.
- giardini 18y agoI would rather hedge my bets. Although one might temper one's judgement by reading "Unskilled and Unaware of It: How Difficulties in Recognizing One's Own Incompetence Lead to Inflated Self-Assessments" by Justin Kruger and David Dunning of Cornell University" http://www.apa.org/journals/features/psp7761121.pdf http://www.apa.org/journals/features/psp7761121.pdf Non-pdf URLs at: http://www.google.com/search?hl=en&q=Unskilled+and+Unaware+of+It%3A+How+Difficulties+in+Recognizing+One%27s+Own+Incompetence+Lead+to+Inflated+Self-Assessments&btnG=Google+Search http://www.google.com/search?hl=en&q=Unskilled+and+Unawa... Should the article apply, one may be doomed!-)
- steveplace 18y agoAnd you could bet on yourself by trading options ;)
- ScottWhigham 18y agoAm I the only one who clicked this hoping for an article about Paul Scholes? Oh well :)