Skip to main content

View Diary: Nobel Prize for Economics = neo-liberal swinefest UPDATED (197 comments)

Comment Preferences

  •  This is an easy one (0+ / 0-)

    Myron Scholes was a member of the board of directors of LTCM.

    LTCM invested in derivatives based on the formula that Scholes invented.

    LTCM imploded in a spectacular fashion during a bull market.

     And yet you still compare that formula to Einstein's.

    None are so hopelessly enslaved, as those who falsely believe they are free. The truth has been kept from the depth of their minds by masters who rule them with lies. -Johann von Goethe

    by gjohnsit on Sat Oct 19, 2013 at 01:05:25 PM PDT

    [ Parent ]

    •  You apparently understand neither LTCM or Black (0+ / 0-)


      As LTCM's capital base grew, they felt pressed to invest that capital and had run out of good bond-arbitrage bets. This led LTCM to undertake more aggressive trading strategies. Although these trading strategies were market neutral, i.e. they were not dependent on overall interest rates or stock prices going up (or down), they were not convergence trades as such. By 1998, LTCM had extremely large positions in areas such as merger arbitrage (betting whether mergers would be completed or not) and S&P 500 options (net short long-term S&P volatility). LTCM had become a major supplier of S&P 500 vega, which had been in demand by companies seeking to essentially insure equities against future declines.[14]
      In short, LTCM was taking positions that could win or lose, not arbitraging.

      You also don't understand Black Scholes.

      Even if I put all my money into options that are mispriced according to Black Scholes, that does not mean that I can't get unlucky.  Black Sholes gives the current value of an option based on the underlying stock's price and volatility.  It says nothing about the future value of that option.

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site