3 ms·

I worked in an investment bank (Barclays Capital) in 2008, and at the time we were already developing models which could handle negative interest rates. The ide

I worked in an investment bank (Barclays Capital) in 2008, and at the time we were already developing models which could handle negative interest rates. The idea that this is somehow a new problem that has "broken the pillars of modern finance" is bizarre.

rolltiide 7y ago
As the article states, this is more about getting two people to agree on the price of illiquid derivatives So you have your counterparty on the phone or in group chat and you arent using the same formulas in the same way then its difficult to get same pricing
- frausto 7y ago
  That's a good way to put it. As my economics professors liked to point out, Black-Scholes was a self-fulfilling prophecy in that the success of the model was determined by the fact that everyone was using it (or some variation of it) to price derivatives. If it had never been published would it still have been as accurate? Who knows. When you dive deep it's easy to think of economics in terms of math and forget the fact that, unlike physics, it is a social field and there is no right and wrong aside from what people agree on.
  - alfiedotwtf 7y ago
    > If it had never been published would it still have been as accurate? Who knows. I think if prices didn’t follow the model, there will be arbitrage opportunities either in the options or the underlying.
lucozade 7y ago
The vanilla European swaptions market has always quoted wrt the Black model. If you strip out the hyperbole, I think this article is suggesting that they're looking for a cheap and cheerful model that accepts negative forwards. It's somewhat orthogonal to how financial organisations actually fair value their rates volatility. All the market makers had to move away from log normal vols years ago as negative forwards have been around for a long time in other currencies.
gbronner 7y ago
One of the key problems with HW was that rates could go negative, and quite negative -- this was considered in 01/02 if not before.

rolltiide 7y ago

As the article states, this is more about getting two people to agree on the price of illiquid derivatives So you have your counterparty on the phone or in group chat and you arent using the same formulas in the same way then its difficult to get same pricing

frausto 7y ago
That's a good way to put it. As my economics professors liked to point out, Black-Scholes was a self-fulfilling prophecy in that the success of the model was determined by the fact that everyone was using it (or some variation of it) to price derivatives. If it had never been published would it still have been as accurate? Who knows. When you dive deep it's easy to think of economics in terms of math and forget the fact that, unlike physics, it is a social field and there is no right and wrong aside from what people agree on.
- alfiedotwtf 7y ago
  > If it had never been published would it still have been as accurate? Who knows. I think if prices didn’t follow the model, there will be arbitrage opportunities either in the options or the underlying.

lucozade 7y ago

The vanilla European swaptions market has always quoted wrt the Black model. If you strip out the hyperbole, I think this article is suggesting that they're looking for a cheap and cheerful model that accepts negative forwards. It's somewhat orthogonal to how financial organisations actually fair value their rates volatility. All the market makers had to move away from log normal vols years ago as negative forwards have been around for a long time in other currencies.

gbronner 7y ago

One of the key problems with HW was that rates could go negative, and quite negative -- this was considered in 01/02 if not before.