Is the Black Scholes Model Responsible for the Credit Crunch

1227 E791401 Is the Black Scholes Model Responsible for the Credit Crunch? 30.00 204 20.00 20,00 LLL The credit crunch had almost 200 nothing at all to do with the Black-Scholes equation that we use to value options, derivatives and futures. 1995 1990 1985 90 15,75 c=[S-PV(d)]N(x)-PV(k)[N(x)] The equation is correct, the problem is that it has parameters that need to be estimated, and when the estimates that are used and are incorrect, the result is garbage (garbage in, garbage out). where S-PV(d) In PV(k) oT 1 S-PV(d) In PV(k) 1 X, = The model did not fail. It describes the workings of the market corectly in a complete risk neutral works. If the data one uses is incorrect, the result is rubbish. It is a failing of the people who made inappropriate use of the model, who used incorrect data, not of the model itself. One must not rely blindly on any model but make use of it wisely. Models should serve as a reference point. It reminds you concerning the inputs: garbage in, garbage out. The model as such has not increased risk. People who abuse the model created additional risk. This would be like faulting Isaac Newton's Laws of Motion for car accidents. It is the drivers who are at fault, not Newton's equations. Derivatives created a booming global economy, but they also led to turbulent markets, the credit crunch, the near collapse of the banking system and the economic slump. And it was the Black-Scholes equation that opened up the world of derivatives. In the wake of the financial crisis of 2008, economists and pundits alike have questioned what went wrong. Some put the blame squarely on Washington, singling out both the Federal Reserve's COVERNORS OARD OF Almost 0%interest near-zero interest %24 The problem solved mathematically by the Black-Scholes equation, is how to price options, but do not entail the obligation, to buy or sell something, usually a good or a security, at a certain date or a certain price. One particularly compelling aspect of the Black-Scholes options pricing formula was the discovery "that the value of options does not depend upon the investors' attitude toward risk." This, in many ways, is Cost counterintuitive. The Black-Scholes equation, of Course, did not materialize out of thin air. Numerous people and their discoveries and theories, at times both flawed and groundbreaking, paved the way for the options-price formula. Was an equation to blame for the financial crash, then? Yes and no. Black-Scholes may have contributed to the crash, but only because it was abused. Bad inputs into the formulas make the markets go bad. The Black-Scholes equation was based on arbitrage pricing theory, in which both drift and volatility are constant. This assumption is common in financial theory, but it is often false for real markets. The equation also assumes that there are no transaction costs, no limits on short-selling and that money can always be lent and borrowed at a known, fixed, risk-free interest rate. Again, reality is often very different. Markete Prices Option prices are not determined by the Black-Scholes equation. In fact options and other derivatives were traded long before the Black-Scholes formula came about. As is the case with all markets, it is the markets that determine prices, not an equation. To argue that Black-Scholes contributed to the crisis is like Profit saying the bond/spread formulas or the perpetuity formula above contributed to the mispricing of bonds and properties, thus causing the crisis. Finance Income Juct Тeamwork Technology Product Sources: http://www.mathfinance.cn http://axiomaticeconomics.com/black-scholes.php http://financialreviewofbooks.com/ http://math-frolic.blogspot.com/2012/02/ian-stewart-on-black-scholes.html http://nacvaquickread.wordpress.com/2012/02/24/wall-streets-sexiest-model-black-scholes/ http://soberlook.com/2012/02/black-scholes-pricing-formula-had.html http://www.clearingandsettlement.com/2012/02/black-scholes-didnt-cause-the-financial-crash/ http://www.forbes.com/sites/timworstall/2012/02/13/black-scholes-didnt-cause-the-financial-crash/ http://www.ier.com.ua/en/publications/consultancy_work/?pid=2469 • OF THE SYSTEN Risk Benefit 1227 E791401 Is the Black Scholes Model Responsible for the Credit Crunch? 30.00 204 20.00 20,00 LLL The credit crunch had almost 200 nothing at all to do with the Black-Scholes equation that we use to value options, derivatives and futures. 1995 1990 1985 90 15,75 c=[S-PV(d)]N(x)-PV(k)[N(x)] The equation is correct, the problem is that it has parameters that need to be estimated, and when the estimates that are used and are incorrect, the result is garbage (garbage in, garbage out). where S-PV(d) In PV(k) oT 1 S-PV(d) In PV(k) 1 X, = The model did not fail. It describes the workings of the market corectly in a complete risk neutral works. If the data one uses is incorrect, the result is rubbish. It is a failing of the people who made inappropriate use of the model, who used incorrect data, not of the model itself. One must not rely blindly on any model but make use of it wisely. Models should serve as a reference point. It reminds you concerning the inputs: garbage in, garbage out. The model as such has not increased risk. People who abuse the model created additional risk. This would be like faulting Isaac Newton's Laws of Motion for car accidents. It is the drivers who are at fault, not Newton's equations. Derivatives created a booming global economy, but they also led to turbulent markets, the credit crunch, the near collapse of the banking system and the economic slump. And it was the Black-Scholes equation that opened up the world of derivatives. In the wake of the financial crisis of 2008, economists and pundits alike have questioned what went wrong. Some put the blame squarely on Washington, singling out both the Federal Reserve's COVERNORS OARD OF Almost 0%interest near-zero interest %24 The problem solved mathematically by the Black-Scholes equation, is how to price options, but do not entail the obligation, to buy or sell something, usually a good or a security, at a certain date or a certain price. One particularly compelling aspect of the Black-Scholes options pricing formula was the discovery "that the value of options does not depend upon the investors' attitude toward risk." This, in many ways, is Cost counterintuitive. The Black-Scholes equation, of Course, did not materialize out of thin air. Numerous people and their discoveries and theories, at times both flawed and groundbreaking, paved the way for the options-price formula. Was an equation to blame for the financial crash, then? Yes and no. Black-Scholes may have contributed to the crash, but only because it was abused. Bad inputs into the formulas make the markets go bad. The Black-Scholes equation was based on arbitrage pricing theory, in which both drift and volatility are constant. This assumption is common in financial theory, but it is often false for real markets. The equation also assumes that there are no transaction costs, no limits on short-selling and that money can always be lent and borrowed at a known, fixed, risk-free interest rate. Again, reality is often very different. Markete Prices Option prices are not determined by the Black-Scholes equation. In fact options and other derivatives were traded long before the Black-Scholes formula came about. As is the case with all markets, it is the markets that determine prices, not an equation. To argue that Black-Scholes contributed to the crisis is like Profit saying the bond/spread formulas or the perpetuity formula above contributed to the mispricing of bonds and properties, thus causing the crisis. Finance Income Juct Тeamwork Technology Product Sources: http://www.mathfinance.cn http://axiomaticeconomics.com/black-scholes.php http://financialreviewofbooks.com/ http://math-frolic.blogspot.com/2012/02/ian-stewart-on-black-scholes.html http://nacvaquickread.wordpress.com/2012/02/24/wall-streets-sexiest-model-black-scholes/ http://soberlook.com/2012/02/black-scholes-pricing-formula-had.html http://www.clearingandsettlement.com/2012/02/black-scholes-didnt-cause-the-financial-crash/ http://www.forbes.com/sites/timworstall/2012/02/13/black-scholes-didnt-cause-the-financial-crash/ http://www.ier.com.ua/en/publications/consultancy_work/?pid=2469 • OF THE SYSTEN Risk Benefit 1227 E791401 Is the Black Scholes Model Responsible for the Credit Crunch? 30.00 204 20.00 20,00 LLL The credit crunch had almost 200 nothing at all to do with the Black-Scholes equation that we use to value options, derivatives and futures. 1995 1990 1985 90 15,75 c=[S-PV(d)]N(x)-PV(k)[N(x)] The equation is correct, the problem is that it has parameters that need to be estimated, and when the estimates that are used and are incorrect, the result is garbage (garbage in, garbage out). where S-PV(d) In PV(k) oT 1 S-PV(d) In PV(k) 1 X, = The model did not fail. It describes the workings of the market corectly in a complete risk neutral works. If the data one uses is incorrect, the result is rubbish. It is a failing of the people who made inappropriate use of the model, who used incorrect data, not of the model itself. One must not rely blindly on any model but make use of it wisely. Models should serve as a reference point. It reminds you concerning the inputs: garbage in, garbage out. The model as such has not increased risk. People who abuse the model created additional risk. This would be like faulting Isaac Newton's Laws of Motion for car accidents. It is the drivers who are at fault, not Newton's equations. Derivatives created a booming global economy, but they also led to turbulent markets, the credit crunch, the near collapse of the banking system and the economic slump. And it was the Black-Scholes equation that opened up the world of derivatives. In the wake of the financial crisis of 2008, economists and pundits alike have questioned what went wrong. Some put the blame squarely on Washington, singling out both the Federal Reserve's COVERNORS OARD OF Almost 0%interest near-zero interest %24 The problem solved mathematically by the Black-Scholes equation, is how to price options, but do not entail the obligation, to buy or sell something, usually a good or a security, at a certain date or a certain price. One particularly compelling aspect of the Black-Scholes options pricing formula was the discovery "that the value of options does not depend upon the investors' attitude toward risk." This, in many ways, is Cost counterintuitive. The Black-Scholes equation, of Course, did not materialize out of thin air. Numerous people and their discoveries and theories, at times both flawed and groundbreaking, paved the way for the options-price formula. Was an equation to blame for the financial crash, then? Yes and no. Black-Scholes may have contributed to the crash, but only because it was abused. Bad inputs into the formulas make the markets go bad. The Black-Scholes equation was based on arbitrage pricing theory, in which both drift and volatility are constant. This assumption is common in financial theory, but it is often false for real markets. The equation also assumes that there are no transaction costs, no limits on short-selling and that money can always be lent and borrowed at a known, fixed, risk-free interest rate. Again, reality is often very different. Markete Prices Option prices are not determined by the Black-Scholes equation. In fact options and other derivatives were traded long before the Black-Scholes formula came about. As is the case with all markets, it is the markets that determine prices, not an equation. To argue that Black-Scholes contributed to the crisis is like Profit saying the bond/spread formulas or the perpetuity formula above contributed to the mispricing of bonds and properties, thus causing the crisis. Finance Income Juct Тeamwork Technology Product Sources: http://www.mathfinance.cn http://axiomaticeconomics.com/black-scholes.php http://financialreviewofbooks.com/ http://math-frolic.blogspot.com/2012/02/ian-stewart-on-black-scholes.html http://nacvaquickread.wordpress.com/2012/02/24/wall-streets-sexiest-model-black-scholes/ http://soberlook.com/2012/02/black-scholes-pricing-formula-had.html http://www.clearingandsettlement.com/2012/02/black-scholes-didnt-cause-the-financial-crash/ http://www.forbes.com/sites/timworstall/2012/02/13/black-scholes-didnt-cause-the-financial-crash/ http://www.ier.com.ua/en/publications/consultancy_work/?pid=2469 • OF THE SYSTEN Risk Benefit 1227 E791401 Is the Black Scholes Model Responsible for the Credit Crunch? 30.00 204 20.00 20,00 LLL The credit crunch had almost 200 nothing at all to do with the Black-Scholes equation that we use to value options, derivatives and futures. 1995 1990 1985 90 15,75 c=[S-PV(d)]N(x)-PV(k)[N(x)] The equation is correct, the problem is that it has parameters that need to be estimated, and when the estimates that are used and are incorrect, the result is garbage (garbage in, garbage out). where S-PV(d) In PV(k) oT 1 S-PV(d) In PV(k) 1 X, = The model did not fail. It describes the workings of the market corectly in a complete risk neutral works. If the data one uses is incorrect, the result is rubbish. It is a failing of the people who made inappropriate use of the model, who used incorrect data, not of the model itself. One must not rely blindly on any model but make use of it wisely. Models should serve as a reference point. It reminds you concerning the inputs: garbage in, garbage out. The model as such has not increased risk. People who abuse the model created additional risk. This would be like faulting Isaac Newton's Laws of Motion for car accidents. It is the drivers who are at fault, not Newton's equations. Derivatives created a booming global economy, but they also led to turbulent markets, the credit crunch, the near collapse of the banking system and the economic slump. And it was the Black-Scholes equation that opened up the world of derivatives. In the wake of the financial crisis of 2008, economists and pundits alike have questioned what went wrong. Some put the blame squarely on Washington, singling out both the Federal Reserve's COVERNORS OARD OF Almost 0%interest near-zero interest %24 The problem solved mathematically by the Black-Scholes equation, is how to price options, but do not entail the obligation, to buy or sell something, usually a good or a security, at a certain date or a certain price. One particularly compelling aspect of the Black-Scholes options pricing formula was the discovery "that the value of options does not depend upon the investors' attitude toward risk." This, in many ways, is Cost counterintuitive. The Black-Scholes equation, of Course, did not materialize out of thin air. Numerous people and their discoveries and theories, at times both flawed and groundbreaking, paved the way for the options-price formula. Was an equation to blame for the financial crash, then? Yes and no. Black-Scholes may have contributed to the crash, but only because it was abused. Bad inputs into the formulas make the markets go bad. The Black-Scholes equation was based on arbitrage pricing theory, in which both drift and volatility are constant. This assumption is common in financial theory, but it is often false for real markets. The equation also assumes that there are no transaction costs, no limits on short-selling and that money can always be lent and borrowed at a known, fixed, risk-free interest rate. Again, reality is often very different. Markete Prices Option prices are not determined by the Black-Scholes equation. In fact options and other derivatives were traded long before the Black-Scholes formula came about. As is the case with all markets, it is the markets that determine prices, not an equation. To argue that Black-Scholes contributed to the crisis is like Profit saying the bond/spread formulas or the perpetuity formula above contributed to the mispricing of bonds and properties, thus causing the crisis. Finance Income Juct Тeamwork Technology Product Sources: http://www.mathfinance.cn http://axiomaticeconomics.com/black-scholes.php http://financialreviewofbooks.com/ http://math-frolic.blogspot.com/2012/02/ian-stewart-on-black-scholes.html http://nacvaquickread.wordpress.com/2012/02/24/wall-streets-sexiest-model-black-scholes/ http://soberlook.com/2012/02/black-scholes-pricing-formula-had.html http://www.clearingandsettlement.com/2012/02/black-scholes-didnt-cause-the-financial-crash/ http://www.forbes.com/sites/timworstall/2012/02/13/black-scholes-didnt-cause-the-financial-crash/ http://www.ier.com.ua/en/publications/consultancy_work/?pid=2469 • OF THE SYSTEN Risk Benefit 1227 E791401 Is the Black Scholes Model Responsible for the Credit Crunch? 30.00 204 20.00 20,00 LLL The credit crunch had almost 200 nothing at all to do with the Black-Scholes equation that we use to value options, derivatives and futures. 1995 1990 1985 90 15,75 c=[S-PV(d)]N(x)-PV(k)[N(x)] The equation is correct, the problem is that it has parameters that need to be estimated, and when the estimates that are used and are incorrect, the result is garbage (garbage in, garbage out). where S-PV(d) In PV(k) oT 1 S-PV(d) In PV(k) 1 X, = The model did not fail. It describes the workings of the market corectly in a complete risk neutral works. If the data one uses is incorrect, the result is rubbish. It is a failing of the people who made inappropriate use of the model, who used incorrect data, not of the model itself. One must not rely blindly on any model but make use of it wisely. Models should serve as a reference point. It reminds you concerning the inputs: garbage in, garbage out. The model as such has not increased risk. People who abuse the model created additional risk. This would be like faulting Isaac Newton's Laws of Motion for car accidents. It is the drivers who are at fault, not Newton's equations. Derivatives created a booming global economy, but they also led to turbulent markets, the credit crunch, the near collapse of the banking system and the economic slump. And it was the Black-Scholes equation that opened up the world of derivatives. In the wake of the financial crisis of 2008, economists and pundits alike have questioned what went wrong. Some put the blame squarely on Washington, singling out both the Federal Reserve's COVERNORS OARD OF Almost 0%interest near-zero interest %24 The problem solved mathematically by the Black-Scholes equation, is how to price options, but do not entail the obligation, to buy or sell something, usually a good or a security, at a certain date or a certain price. One particularly compelling aspect of the Black-Scholes options pricing formula was the discovery "that the value of options does not depend upon the investors' attitude toward risk." This, in many ways, is Cost counterintuitive. The Black-Scholes equation, of Course, did not materialize out of thin air. Numerous people and their discoveries and theories, at times both flawed and groundbreaking, paved the way for the options-price formula. Was an equation to blame for the financial crash, then? Yes and no. Black-Scholes may have contributed to the crash, but only because it was abused. Bad inputs into the formulas make the markets go bad. The Black-Scholes equation was based on arbitrage pricing theory, in which both drift and volatility are constant. This assumption is common in financial theory, but it is often false for real markets. The equation also assumes that there are no transaction costs, no limits on short-selling and that money can always be lent and borrowed at a known, fixed, risk-free interest rate. Again, reality is often very different. Markete Prices Option prices are not determined by the Black-Scholes equation. In fact options and other derivatives were traded long before the Black-Scholes formula came about. As is the case with all markets, it is the markets that determine prices, not an equation. To argue that Black-Scholes contributed to the crisis is like Profit saying the bond/spread formulas or the perpetuity formula above contributed to the mispricing of bonds and properties, thus causing the crisis. Finance Income Juct Тeamwork Technology Product Sources: http://www.mathfinance.cn http://axiomaticeconomics.com/black-scholes.php http://financialreviewofbooks.com/ http://math-frolic.blogspot.com/2012/02/ian-stewart-on-black-scholes.html http://nacvaquickread.wordpress.com/2012/02/24/wall-streets-sexiest-model-black-scholes/ http://soberlook.com/2012/02/black-scholes-pricing-formula-had.html http://www.clearingandsettlement.com/2012/02/black-scholes-didnt-cause-the-financial-crash/ http://www.forbes.com/sites/timworstall/2012/02/13/black-scholes-didnt-cause-the-financial-crash/ http://www.ier.com.ua/en/publications/consultancy_work/?pid=2469 • OF THE SYSTEN Risk Benefit