3 ms·

There are lots of examples of techniques that won their inventors Nobels in Econ (and sometimes even sciences) going on to being used to make lots of money in f

by smanek 17y ago

There are lots of examples of techniques that won their inventors Nobels in Econ (and sometimes even sciences) going on to being used to make lots of money in finance. A famous example being the Black Scholes model for option pricing, which won its inventors the Nobel Prize in Econ. Myron Scholes went on to create one of the first 'quant' funds (LTCM) back 1994 (which flamed out spectacularly during Russia's crisis in 1998.)

Confusion 17y ago
Lots? Can you name a few beyond Black-Scholes that are applicable to derivatives trading? From looking at the list of Nobel prize winners, I can't. Interestingly, in a course on statistical physics, the prof showed that by performing the correct transformations on the central equation of the Black-Scholes model, you can actually reduce it to a plain diffusion equation. He wondered whether it was reasonable to hand out a Nobel prize for that.
- maurycy 17y ago
  To name a few: Engle, Granger, Merton, Markowitz, Miller, Sharpe. Shortly, they're used frequently in the area of risk management. With some good faith you can also take into account the assymetric informations study, so Akerlof, Spence, Stiglitz, Vickrey; also, if you're big enough to move the prices by your orders, the game theory applies: Selten, Nash, Harsanyi. As for the Black-Scholes, from what I understand, the biggest insight is that the volatility of the stock is basically the risk. The problems with the non-constant volatility, led to studying different (ARCH, GARCH) models and work appreciated by a Nobel in 2003.
  - KonaB 17y ago
    Interestingly, when Markowitz invested his own money, he invested 50% in stocks, and 50% in bonds. If the creator did not believe in his own creation, I don't think anyone should. BTW, Engle's work is kind of useless in the real-world...

3 ms·

There are lots of examples of techniques that won their inventors Nobels in Econ (and sometimes even sciences) going on to being used to make lots of money in f

by smanek 17y ago

Confusion 17y ago
Lots? Can you name a few beyond Black-Scholes that are applicable to derivatives trading? From looking at the list of Nobel prize winners, I can't. Interestingly, in a course on statistical physics, the prof showed that by performing the correct transformations on the central equation of the Black-Scholes model, you can actually reduce it to a plain diffusion equation. He wondered whether it was reasonable to hand out a Nobel prize for that.
- maurycy 17y ago
  To name a few: Engle, Granger, Merton, Markowitz, Miller, Sharpe. Shortly, they're used frequently in the area of risk management. With some good faith you can also take into account the assymetric informations study, so Akerlof, Spence, Stiglitz, Vickrey; also, if you're big enough to move the prices by your orders, the game theory applies: Selten, Nash, Harsanyi. As for the Black-Scholes, from what I understand, the biggest insight is that the volatility of the stock is basically the risk. The problems with the non-constant volatility, led to studying different (ARCH, GARCH) models and work appreciated by a Nobel in 2003.
  - KonaB 17y ago
    Interestingly, when Markowitz invested his own money, he invested 50% in stocks, and 50% in bonds. If the creator did not believe in his own creation, I don't think anyone should. BTW, Engle's work is kind of useless in the real-world...