Lessons from Statistical Finance
Iwant to shed some light on the current financial crises from the point of view of financial risk. By understanding the known failures of the classical model of Black and Scholes we can hope to unveil the pitfalls of more recent models such as copula models for CDO (Collateralized Debt Obligation) pricing. From this analysis we will realize that a major effect missing from modern mathematical models is the phenomenon of price impact and the resulting feedback loops between trading strategies and asset prices. I should state that my point of view is entrenched in my background as a physicist and a financial practitioner.
KeywordsHedge Fund Copula Model Liquidity Risk Credit Derivative Scholes Model
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