I'm an amateur,
The beginning of wisdom.
but I can solve and understand Black-Scholes,
since this is nothing but Fokker-Planck equation in Theoretical
Physics (that's my degree).
Mine too. BS was actually conceived from Bachelier's functional integration. Einstein used it in his studies of Brownian motion. The diffusion equation doesn't provide a good model but Merton swore by it.
I taught the underlying math for 5 years, including probability,
statistics, linear algebra, and PDEs.
All elementary analysis, and all boring. The stuff we had to crunch through as undergrads.
No, not in finance.
The above has little to do with the mechanics of these financial systems. In fact, on the options floor you have all these guys trying to reconcile some model, BS, Merton, Ito, or whatever, with the fluctuations in the real world. Hopeless. They're not of practical value, and especially not in outlier regimes.
I do think the pros are missing it completely, robotic
trading is a huge bubble waiting to pop!
You were going good there and now you're reverting back to stupidity? You see this in your students yet as soon as you're out of your expertise, you're emulating them. When do we learn? Never.
"Robotic trading" (which isn't the problem at all since only a few institutions like Battery Marche do it) is not a huge bubble. If you don't want large fluctuations, then rules must be followed. The DM admin is NOT directing its SEC to enforce the existing rules. However, there's nothing wrong with large instantaneous fluctuations which clean out all the fool gamblers and rectify a negative internal state. If you buy and hold based on faith, you will wildly succeed, but if you trade, you're DOA.
Black-Scholes is not a holy grail, and it does have a built in flaw,
Yes, like the bond price dynamic is a complex function of time and makes the resulting ansatz intractable, the stock price dynamic has a perfectly indeterminate volatility, and ADM - like lapse and shift adaptive solutions diverge as function of price. BS is, well, bs. Use Merton.
which was papered over by the Fed for quite some time,
Another segue. What has FED have to do with any of this? FED does not set the stable bond dynamic. The Tmarket does, more or less.
and remains the key reason for this deep instability and the
emergence of robotic bubble.
Didn't you look up my references in US Financial Data? What kind of a scientist are you? You must investigate. I'm seeing a major flaw here in how you conduct yourself.
The Fed used sand paper on the tails of the distribution function, leading to INCREASED systemic risk.
This statement, aside from its overt emotionalism, is explicitly contradictory and/or absurd. If FED raises short term interest rates, is risk changed? Is systematic risk changed? Can either of these questions even be answered? They can, but only within bounds that make the answers unrevealing. More to the point, such changes don't change inherent risk as expressed in the a priori density function of the systems modelled. You're saying FED changes the structure of markets sufficiently so density functions have to be modified meaningfully. That has never occurred. If it did occur, BS output would diverge from past equi parameter input. BS output is the same as it was in 1973. It doesn't work any better now than it did then.
You can't do that, as this increases the probability of tails, a lot.
What probability density function are you referring to?
Now they have to apply it constantly, otherwise the unstable system will crash.
Nope, or gibberish. Crashes come from public excesses. FED reacts to excesses and tries to make them stable.
All IMHO, and I really appreciate your input.
Please study US financial data and get a handle on your subject. Don't deal with me the way your students deal with you. Else, you'll be acting like FED officials who tell their students all about the necessity of free markets, but don't want one in money.
The market today is not a random walk,
I've been on the front lines and I think it randomly distributed. There's no info in price. Coin tossing gives better stock charts.
it is a deeply unbalanced POS, waiting for it's time to crash.
I feel your pain...
BWDIK?
Clean it up.
What happened Yesterday was a fat tail tremor,
Nope. Just an outlier of the Gaussian.
and unless liquidity is applied, it could grow into a systemic issue shortly.
Are you saying that we the people can't do it? Might have a point there given the ever growing predilection for socialism here which, as we see, can make us Grecian at half the price. |
