3 ms·

Vehemently agree, in particular this > no professional uses a Gaussian assumption without knowing what they're doing I would say Black Scholes set the theme,

by srean 10y ago

Vehemently agree, in particular this > no professional uses a Gaussian assumption without knowing what they're doing I would say Black Scholes set the theme, but the details had to be modified quite a bit. Unmodified BS is BS. 'Fat tailing' would be very unlikely to give one a better prediction accuracy. It can, however, give one a better appreciation of the risk.

JumpCrisscross 10y ago
> Unmodified [Black Scholes] is BS Black-Scholes-Merton is a theory. Analogous to Newtonian mechanics or textbook thermodynamics. They all need modification to work in the real world. That doesn't make them BS. > [Using a fat-tailed distribution] can, however, give one a better appreciation of the risk How does one choose a model and parameters for events which are, by definition, hard to predict? Keep in mind that most "black swans" arise from unforeseen dimensions of risk. There's the "my stock lost 90% of its value" fat tail versus "the damn exchange went bust". There's "my clearing bank is broke" and "the Russians invaded my country".