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This only means that the real probability density function is parameterized by a sum of many Gaussian functions. Considering that the real implied returns are a
by sprash 6y ago
This only means that the real probability density function is parameterized by a sum of many Gaussian functions. Considering that the real implied returns are a skewed "gaussian-like thing" this is not the worst thing to do. Truly, using BS in this context is more or less historically motivated but I doubt there are far less "expensive" ways out there to find a suitable parameterization, what ever "expensive" means.
- jevgeni 6y ago“Expensive” (at least for market makers) means you have to maintain a staff of quants whose job is to essentially create a curtain of rigor and hide the fact that traders usually rely on a bunch of simpler models to judge the broad dynamics and their gut for actual business decisions.