Derivative Pricing
According to BIS, there are some $420 trillion worth of outstanding derivative contracts as of 2007. Interestingly, the GDP of the rich man's club of G-7 countries is around $40 trillion. Theoretically, this means that any trouble in the global derivatives market, will make the recent sub-prime and mono-line insurance meltdown, look like child's play.
Michael Lewis quoting Nassim Nicholas Taleb says:
"In the past two years, Taleb has co-authored a pair of papers that have appeared in the sort of academic journals that originally published the Black-Scholes model. He and his co-author attack the model head-on in its own language (math), and as much as call for a retraction of the Nobel Prize awarded to Myron Scholes and Robert Merton for their work in creating the model. "This is what I'm saying to Merton and Scholes," Taleb says. "You guys are just parasites. You're not bringing anything useful to the market. You are lecturing birds on how to fly. You're watching them fly. And then you're taking credit for it."
The fundamental issue that is being raised is that the Black-Scholes model is inadequate for accurate pricing of risk and hence there is a possibility of extreme events testing the robustness of the global derivatives market.
Nassim Taleb's problem is not that his point of view is invalid. But having made his point, he refuses to move on. While it is possible that Black-Scholes may be inadequate or downright incorrect, the way forward is to build a new, better and robust model, which the industry can use with confidence.
To quote Sir Newton: "If I have seen further than other men, it is by standing upon the shoulders of giants."
For the complete article by Lewis see: Black-Scholes
Michael Lewis quoting Nassim Nicholas Taleb says:
"In the past two years, Taleb has co-authored a pair of papers that have appeared in the sort of academic journals that originally published the Black-Scholes model. He and his co-author attack the model head-on in its own language (math), and as much as call for a retraction of the Nobel Prize awarded to Myron Scholes and Robert Merton for their work in creating the model. "This is what I'm saying to Merton and Scholes," Taleb says. "You guys are just parasites. You're not bringing anything useful to the market. You are lecturing birds on how to fly. You're watching them fly. And then you're taking credit for it."
The fundamental issue that is being raised is that the Black-Scholes model is inadequate for accurate pricing of risk and hence there is a possibility of extreme events testing the robustness of the global derivatives market.
Nassim Taleb's problem is not that his point of view is invalid. But having made his point, he refuses to move on. While it is possible that Black-Scholes may be inadequate or downright incorrect, the way forward is to build a new, better and robust model, which the industry can use with confidence.
To quote Sir Newton: "If I have seen further than other men, it is by standing upon the shoulders of giants."
For the complete article by Lewis see: Black-Scholes
posted by OptionSwap at
9:39 AM
1 Comments:
Interesting Insights Phani. Taleb's Black Swan has become a buzz word in financial market circles. The book has become a best seller. I think Poker face of Wall Street also captures the gambling essence of big finance
By
Gangineni Dhananjhay, At
April 14, 2008 6:39 AM
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