3 ms·

Just out of curiosity, how do you model crashes with an assumption of "efficient and rational" markets?

• exelius 12y ago
  You don't; and most models don't even try because the causes behind market crashes are often complex, interdependent relationships that often aren't fully understood until after the crash has happened. But you can use other tools to perform a catastrophic risk analysis that basically asks questions like "Let's say our assumptions change; what does this model look like in a world where every mortgage-backed security drops to junk status?". Problem is, the companies selling said securities have no interest in identifying the downside. Nor are they legally obligated to since they are selling these products to "professional investors" who ostensibly should know better.