Options, Futures, and Other Derivatives
I really like the following quote from Fooled by Randomness (pp. 55-56): “Things are always obvious after the fact… It has to do with the way that our mind handles historical information. When you look at the past, the past will always be deterministic, since only one single observation took place.”
This [...]
On Thursday, we completed the Statistics tutorial, in that we discussed the Central Limit Theorem (CLT) and implications for finance. The main implication is that finance models treat variance as the “appropriate” risk measure (since the CLT implies that non-normal distributions such as binomial, uniform, chi square (and many others) converge in probability to the [...]
In class today, I referenced a page 1 Wall Street Journal from several years back entitled “As Two Economists Debate Markets, the Tide Shifts“. Although this article appeared in WSJ more than 7 years ago, it remains quite relevant to this day in that it provides a very clear explanation of the intellectual [...]
In my previous blog posting, I was quite critical concerning Mandelbrot’s ideas pertaining to risk management. However, I have tremendous respect for his scholarly contributions and although I do not understand fractal geometry per se, what’s not to like about it? Therefore, I highly recommend the following 17 minute “TED Talks” video featuring [...]
Today in class we discussed, among other things, the work of the late Yale mathematician Benoît Mandelbrot. Mandelbrot was most famous for his seminal work in the field of fractal geometry, but is also considered by many (e.g., Nassim Nicholas Taleb, the author of Fooled by [...]
Earlier this week (specifically, this past Monday, 23 January), I posted a blog entry entitled “Mind over Money – can markets be “rational” even if humans aren’t?” which provides information concerning an extra credit opportunity for Finance 4366. I am posting this as a reminder, particularly since we spent a fair amount of [...]
Hat tip to Matthew East for pointing this out (source: http://www.wolframalpha.com/input/?i=winning+lottery+numbers):
The Intrade market provides interesting real world examples of contracts where the “underlying” is not a traded security or commodity; rather it is a so-called “primitive” or state-contingent variable. For what it’s worth, I have blogged extensively about the prediction markets (e.g., see http://blog.garven.com/category/prediction-markets) since 2004; particularly how these markets generally provide [...]
In problem set 2, question 1, you are asked to calculate the expected value of a game based upon the roll of 3 dice. You pay $1 to participate in this game, and receive payoffs of 1) $4 if a number that you select appears on a 3 dice, 2) $3 if a number that [...]
