On Sun, Jul 29, 2012 at 4:19 PM, Doug Henwood <[email protected]> wrote: > > On Jul 29, 2012, at 1:39 PM, Michael Smith wrote: > >> Would the models even have to be any good, or have any >> sound basis? Wouldn't it be enough that people *thought* >> they were good? > > Good question. As I recall, as the models developed, prices increasingly > conformed to predictions, because everyone was trading off the same models. >
Isn't there a circularity in this process - to use Black-Scholes or similar models you need to refer back to the price history to estimate some implied volatility numbers which will then be fed into the Black-Scholes model to generate prices for new financial products etc? The whole process could, in principle, converge to some kind of a fixed point where prices and model confirm each other, but I'd imagine these would be highly unstable. -raghu. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
