5 ms·

I think you need to elaborate more on what exactly you're talking about. Nothing does better than the prime rate? You mean in terms of interest rate? Isn't the

I think you need to elaborate more on what exactly you're talking about. Nothing does better than the prime rate? You mean in terms of interest rate? Isn't the definition of the prime rate the best you can get? In the long term? What does that even mean here? Can I get lucky and do better than the prime rate, whose definition is the best interest rate you can get? Saying this knowledge is basic Mathematical Finance is also very condescending. I haven't taken "that course" but I feel from your tone that you took a 101 college course which now guides your entire mode of economic thinking. Elaborate on your statements.

kruhft 9y ago
4th year Introduction to Mathematical Finance, but basically 101 in a sense. Using a binomial model (essentially a random walk) and using 'the formulas' for portfolio calculation, you will find that in the 'long term' (in math, infinite, but 'a long time' in the real world') you will find that no investment portfolio will beat the Prime Rate, as this is what all returns are based off of. It was just the results I saw from the course. I know one can get 'lucky' and beat the Rate, but overall, as a zero sum game, someone else has to lose and overall the group rate of return is calculated as...the Prime Rate. Sorry for being condescending sounding; I thought this was common knowledege given it's taught in introductory finance.
- gburt 9y ago
  The linked paper is empirical counterevidence to that theoretical model though. Admittedly, we can always just say "we're not in the long run," I'm not sure how useful that is. I'm not certain what model exactly you're talking about, but I think it also probably misses technological change as a real source of growth independent of any monetary musings.
  - kruhft 9y ago
    Theory is an 'efficient' market model. Practice is not. Reminds me of the old joke: An Efficient Market Theorist sees a $100 lying on the ground, and passes it by saying "If that existed, someone else would have picked it up by now!".
    - FabHK 9y ago
      > An Efficient Market Theorist Milton Friedman, in the apocryphal story. And back in my days it was $20 :-)
  - AnimalMuppet 9y ago
    The paper's data set is from 1870 to 2015, which is 145 years. If that's not close enough to "the long run" for the theory to match reality, then the theory is either wrong or useless.
- autokad 9y ago
  the sp500 is not zero sum. you are ignoring dividends, and I think stock buy backs throws a monkey wrench into that assumption as well. lastly, population and economy increases.
- mcguire 9y ago
  Haven't taken a mathematical finance course... What is the long-term historical value of the prime rate? I've seen data showing the overall stock market returns 3% after taxes and inflation for any period longer than about 20 years.
- tim333 9y ago
  The stuff taught in introductory finance is a considerably simplified model of the real world. The prime rate is I believe the rate banks lend to large corporations and those corporations wouldn't bother borrowing unless they could get a return exceeding those costs.
- cantrip 9y ago
  Yeah I don't get why you'd assume 4th year Mathematical Finance would be common knowledge. It still strikes me as knowingly condescending. I don't agree that someone else has to lose in order to gain. That assumes zero growth, which is not the case. I think people don't know what you're talking about because you seem to just be repeating stuff you heard in a lecture hall 10 years ago when the world is vastly more complicated.
- kgwgk 9y ago
  To price derivatives one uses risk-neutral probabilities, which are different from real-world probabilities. The binomial tree you talk about cannot be used to calculate the expected return. Maybe this was not properly explained in the course you took, or maybe you were not paying attention.
- FabHK 9y ago
  It's really not. Judging from your mentioning MC and binomial walks, you might be looking at derivative pricing, and be confused by the facts that - derivatives are zero-net-supply securities, thus they returns are necessarily zero-sum (minus the exchange/bank's cut) - derivatives can be priced using the risk neutral measure (after a change of measure, Girsanov's theorem, yada yada yada) in which mu, the drift of all risky assets, equals r, the risk-free rate. However, that's not statement about how mu is in the real world, but basically an abbreviation for an arbitrage-by-replication argument. At any rate, derivatives pricing is the domain of arbitrage pricing models, while here we are looking at equilibrium models (which consider investors' preferences/utility, unlike arb models).

kruhft 9y ago

4th year Introduction to Mathematical Finance, but basically 101 in a sense. Using a binomial model (essentially a random walk) and using 'the formulas' for portfolio calculation, you will find that in the 'long term' (in math, infinite, but 'a long time' in the real world') you will find that no investment portfolio will beat the Prime Rate, as this is what all returns are based off of. It was just the results I saw from the course. I know one can get 'lucky' and beat the Rate, but overall, as a zero sum game, someone else has to lose and overall the group rate of return is calculated as...the Prime Rate. Sorry for being condescending sounding; I thought this was common knowledege given it's taught in introductory finance.

gburt 9y ago
The linked paper is empirical counterevidence to that theoretical model though. Admittedly, we can always just say "we're not in the long run," I'm not sure how useful that is. I'm not certain what model exactly you're talking about, but I think it also probably misses technological change as a real source of growth independent of any monetary musings.
- kruhft 9y ago
  Theory is an 'efficient' market model. Practice is not. Reminds me of the old joke: An Efficient Market Theorist sees a $100 lying on the ground, and passes it by saying "If that existed, someone else would have picked it up by now!".
  - FabHK 9y ago
    > An Efficient Market Theorist Milton Friedman, in the apocryphal story. And back in my days it was $20 :-)
- AnimalMuppet 9y ago
  The paper's data set is from 1870 to 2015, which is 145 years. If that's not close enough to "the long run" for the theory to match reality, then the theory is either wrong or useless.
autokad 9y ago
the sp500 is not zero sum. you are ignoring dividends, and I think stock buy backs throws a monkey wrench into that assumption as well. lastly, population and economy increases.
mcguire 9y ago
Haven't taken a mathematical finance course... What is the long-term historical value of the prime rate? I've seen data showing the overall stock market returns 3% after taxes and inflation for any period longer than about 20 years.
tim333 9y ago
The stuff taught in introductory finance is a considerably simplified model of the real world. The prime rate is I believe the rate banks lend to large corporations and those corporations wouldn't bother borrowing unless they could get a return exceeding those costs.
cantrip 9y ago
Yeah I don't get why you'd assume 4th year Mathematical Finance would be common knowledge. It still strikes me as knowingly condescending. I don't agree that someone else has to lose in order to gain. That assumes zero growth, which is not the case. I think people don't know what you're talking about because you seem to just be repeating stuff you heard in a lecture hall 10 years ago when the world is vastly more complicated.
kgwgk 9y ago
To price derivatives one uses risk-neutral probabilities, which are different from real-world probabilities. The binomial tree you talk about cannot be used to calculate the expected return. Maybe this was not properly explained in the course you took, or maybe you were not paying attention.
FabHK 9y ago
It's really not. Judging from your mentioning MC and binomial walks, you might be looking at derivative pricing, and be confused by the facts that - derivatives are zero-net-supply securities, thus they returns are necessarily zero-sum (minus the exchange/bank's cut) - derivatives can be priced using the risk neutral measure (after a change of measure, Girsanov's theorem, yada yada yada) in which mu, the drift of all risky assets, equals r, the risk-free rate. However, that's not statement about how mu is in the real world, but basically an abbreviation for an arbitrage-by-replication argument. At any rate, derivatives pricing is the domain of arbitrage pricing models, while here we are looking at equilibrium models (which consider investors' preferences/utility, unlike arb models).