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That's cool! But it relies on the model being an accurate representation of reality, right? What kind of models are we talking about anyways, and what inputs do
by blackbear_ 3y ago
That's cool! But it relies on the model being an accurate representation of reality, right? What kind of models are we talking about anyways, and what inputs do they use? (Asking out of curiosity, not skepticism)
- mhh__ 3y agoA model is a computation based on its initial assumptions. Sometimes that's fine. The key thing is that the (good) practitioners know the finance and know the models. If it's obviously wrong that's a sign in itself - a simple model doesn't fit the market: You might be about to lose some money, or you could take on some risk from other people and get rewarded for it (people are panicking). Weirder derivatives and so on can get more dangerous, of course. However even the really famous example from the 07 crash (pricing CDOs and CDS against them) was arguably due to a deliberate ignorance of widespread fraud and fictitious numbers than the models as per se. Garbage in garbage out (the model was also not great but still)