it's true that if Wall Streeter X buys low and sells high, someone else is losing (Y is selling lower than he could and Z is buying higher than she could) so that no-one is losing when all the the gains and losses are added up. But if the paper values of stocks are really high, there would be over-all loss on paper if the stock prices fall. This paper loss is just on paper, but is a real problem if the paper had been used as collateral (either directly or indirectly) in borrowing.
On 1/1/07, Charles Brown <[EMAIL PROTECTED]> wrote:
Speaking of Black-Scholes limitations, Fischer Black was said to have been astonished at the extensive use of their formula on Wall Street, because he regarded the continuous time and log-normal price assumptions as unrealistic. There is also significant evidence that the Black-Scholes price became a self-fulfilling prophesy, and later when the binomial pricing was introduced, THAT formula quickly became the new self-fulfilling prophesy. See for e.g. "Options markets, self-fulfilling prophecies, and implied volatilities" Cherian, Jarrow et al., 1998 The big question is why was Wall St so eager to adopt unproven formulas based on questionable assumptions. Why were they not scared of losing money? How indeed did they avoid losing money? -raghu. ^^^^^^ CB: It would seem that Wall Street as a whole wouldn't lose money. Any money "lost" would mainly be to "each other", among Wallstreeters. Wallstreet as a whole never loses money nowadays, does it ?
-- Jim Devine / "Young people who pretend to be wise to the ways of the world are mostly just cynics. Cynicism masquerades as wisdom, but it is the farthest thing from it, because cynics don't learn anything. Because cynicism is a self-imposed blindness, a rejection of the world because we are afraid it will hurt us or disappoint us." -- Stephen Colbert.
