Here is a fantastic article by Michael Lewis and Black Scholes model. It is intriguing how we rely so much on probability in markets, however at the same time don't take that into consideration. Is it that the models are too small or that these improbable events are unquantifiable? By small I mean so precise that they cannot or do not take into consideration stuff that is considered extremely rare. Of that the designers of the models cannot even conceive of these events. However, in the last two or three decades there have been consistent "millennial" events every 5-10 years or so. A new model?
Friday, February 22, 2008
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