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The models here actually assume efficient markets and no arbitrage. You calibrate them to market, and if you use them to price a market traded derivative you ho
by fancyfredbot 7y ago
The models here actually assume efficient markets and no arbitrage. You calibrate them to market, and if you use them to price a market traded derivative you hope they give you the market price you put in (if not then by definition they've gone wrong).
They are useful for pricing or replicating other derivatives without available prices, but not really aimed at getting an edge on the market.
- smabie 7y agoSure they are. If the price you calculated and the price in the market is significantly different, the law of no arbitrage is violated and therefore you have can fulfill your sworn duty as a market participant and arbitrage it away until everything is hunkydory again.
- infinite8s 7y agoThats also the reason why the market can never go to 100% passively managed money.