3 ms·

Having two sets of assumptions for buy and sell side is pretty indicative of the quality of the model.

JumpCrisscross 6y ago
> two set of assumptions for buy and sell side is pretty indicative of the quality of the model What does this refer to? And, no. Disagreement on inputs doesn’t convey much about a model—it’s a negotiation. Any model will have procurer and vendor using different inputs when negotiating purchase and sale. That Boeing and steel mill don’t agree on tensile strength assumptions doesn’t mean aircraft designers are winging it.
- jevgeni 6y ago
  Buy-side firms don’t use BS with the same assumptions as market makers. If you’re a fund manager, you are interested in objective estimates of the value. If you’re a market maker you want to show that you can perfectly replicate and thusly hedge your derivatives. Never mind that you have to recalibrate your model every 20 minutes. For a model that is supposed to measure the objective value of an asset, that’s clear failure. BS is at this point just a vague market consensus which stinks more and more, the farther you stray away from vanilla European options.
  - JumpCrisscross 6y ago
    > Never mind that you have to recalibrate your model every 20 minutes Let me know when we make a plane or rocket that doesn’t need to recalibrate it’s flight model every millisecond. As I said, market neutral market makers will use different assumptions from directional buy side shops. To say nothing of their vastly different funding costs and structures. Using input heterogeneity or calibration frequency as an estimator of model quality is...odd.
    - whatever1 6y ago
      We never recalibrate the g constant in our calculations nor we wait a person to announce what the g for this quarter will be.
      - JumpCrisscross 6y ago
        > We never recalibrate the g constant in our calculations nor we wait a person to announce what the g for this quarter will be Sure. But we do update all manner of atmospheric, gravitometric and similar factors in our flight and orbital models. Once again, calibration frequency is a poor predictor of model quality. There are useless models in every domain involving immutable constants. And there are very good numerical methods that have no constants per se.
        jevgeni 6y ago
        Planes don't crash all at once every few years and resume flying only when the airports renegotiated the basic laws of physics. What you are referring to as "re-calibration" in planes and rockets is actually stochastic control and is a completely different topic to calibrating a stochastic model. But hey, I guess you like your metaphors like your risk models: incorrect. Wilmott covered model robustness and calibration frequency. Any time you have to adjust an unobserved term in your SDE (like market price of risk, for example) you are changing the model. So if your model has to be changed every x minutes else it gives wrong results, you're not "adjusting your inputs", you are just using T/x shitty models.
        worik 6y ago
        Some sense. Comparing financial markets to physics is pretty much what made it all explode last two times. It is getting ready to explode again. The asset market has been sedately rising for a decade. Which makes models like really good. \sarcasm{ON} This time is different \sarcasm{OFF} No it is not.
FabHK 6y ago
One should clarify that basically nobody tries to "predict" anything with Black Scholes, just as basically nobody "predicts" share prices by doing a discounted cash flow analysis. Yet, they each provide the conceptual framework for trading (of options and stocks, respectively) in such a way that those that have better predictive power make money, on average, at the expense of those traders that don't. With that, they make the market efficient for traders that trade for other reasons (hedging, investing, gambling, etc.).
- jevgeni 6y ago
  It's a market convention, with as much predictive power as knowing options used to be quoted in vol points.

> two set of assumptions for buy and sell side is pretty indicative of the quality of the model What does this refer to? And, no. Disagreement on inputs doesn’t convey much about a model—it’s a negotiation. Any model will have procurer and vendor using different inputs when negotiating purchase and sale. That Boeing and steel mill don’t agree on tensile strength assumptions doesn’t mean aircraft designers are winging it.

jevgeni 6y ago
Buy-side firms don’t use BS with the same assumptions as market makers. If you’re a fund manager, you are interested in objective estimates of the value. If you’re a market maker you want to show that you can perfectly replicate and thusly hedge your derivatives. Never mind that you have to recalibrate your model every 20 minutes. For a model that is supposed to measure the objective value of an asset, that’s clear failure. BS is at this point just a vague market consensus which stinks more and more, the farther you stray away from vanilla European options.
- JumpCrisscross 6y ago
  > Never mind that you have to recalibrate your model every 20 minutes Let me know when we make a plane or rocket that doesn’t need to recalibrate it’s flight model every millisecond. As I said, market neutral market makers will use different assumptions from directional buy side shops. To say nothing of their vastly different funding costs and structures. Using input heterogeneity or calibration frequency as an estimator of model quality is...odd.
  - whatever1 6y ago
    We never recalibrate the g constant in our calculations nor we wait a person to announce what the g for this quarter will be.
    - JumpCrisscross 6y ago
      > We never recalibrate the g constant in our calculations nor we wait a person to announce what the g for this quarter will be Sure. But we do update all manner of atmospheric, gravitometric and similar factors in our flight and orbital models. Once again, calibration frequency is a poor predictor of model quality. There are useless models in every domain involving immutable constants. And there are very good numerical methods that have no constants per se.
      - jevgeni 6y ago
        Planes don't crash all at once every few years and resume flying only when the airports renegotiated the basic laws of physics. What you are referring to as "re-calibration" in planes and rockets is actually stochastic control and is a completely different topic to calibrating a stochastic model. But hey, I guess you like your metaphors like your risk models: incorrect. Wilmott covered model robustness and calibration frequency. Any time you have to adjust an unobserved term in your SDE (like market price of risk, for example) you are changing the model. So if your model has to be changed every x minutes else it gives wrong results, you're not "adjusting your inputs", you are just using T/x shitty models.
        worik 6y ago
        Some sense. Comparing financial markets to physics is pretty much what made it all explode last two times. It is getting ready to explode again. The asset market has been sedately rising for a decade. Which makes models like really good. \sarcasm{ON} This time is different \sarcasm{OFF} No it is not.

FabHK 6y ago

One should clarify that basically nobody tries to "predict" anything with Black Scholes, just as basically nobody "predicts" share prices by doing a discounted cash flow analysis. Yet, they each provide the conceptual framework for trading (of options and stocks, respectively) in such a way that those that have better predictive power make money, on average, at the expense of those traders that don't. With that, they make the market efficient for traders that trade for other reasons (hedging, investing, gambling, etc.).

jevgeni 6y ago
It's a market convention, with as much predictive power as knowing options used to be quoted in vol points.