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Technology Stocks : AUTOHOME, Inc

ATHM 23.48

+1.2%

3:59 PM EST

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To: Stephen L who wrote (11017)	6/11/1999 1:53:00 PM
From: ahhaha	Read Replies (1) of 29970

It's rare to encounter a well-developed sense of humor, so I appreciate your comments. Actually Merton created his own stock option pricing model which was a competitor to that of Black-Scholes. It was really an extension of it in that the differential equation Merton set up was nearer to the Fokker-Planck Diffusion Equation and was built on adjusted primitives which he called stock price dynamic and bond price dynamic. The BS model though was retained by MMs on the option exchanges because the improvement in accuracy was not worth the extra computations. Where the two diverged the MMs had become so used to the BS model that by habit they would follow it even though reality would at the asymptotic limit follow Merton's model, so they redacted reality. The BS model is still the standard by which the MMs do their post close position delta adjustments. The martingale is a stochastic process which mimics price random movement, but it is inadequate for academic reasons to be used as a probability distribution model. You can see this when graphing its density function and then comparing it with measured stock price equivalents. No theoretic model has been able to do a convincing good job of modelling stock prices. On the other hand the process called "coin toss" which is close to martingale does a remarkably good job of characterizing stock prices, not as as good as the processes mentioned above, but good enough. I have a graph of 5000 trials of the tossing of a coin. It looks like a stock chart to such a fine degree that when I first saw it I had this feeling of "abandon all hope, ye who enter here", because I saw that a random process isn't equivalent to white noise. The theory of runs intervenes. The coin tossing graph went on major up trends with head-and-shoulder tops and these extended upside or downside runs were the norm. If the major action is equivalent to a random process, then the micro action is also. Therefore, trading is doomed to the negative expectation inherent in the a priori structure of price action. Your only hope is fundamentals which sets a trend. The random walk still occurs and destroys traders, but the walk can have drift. It is our job to anticipate where state is undergoing transition to a higher trend. Are you listening ATHM?

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