optionshedge
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Interesting article on risk management models:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aW2ByfpGZflA
Business schools should teach empirical analysis and drop risk-management models that failed to foresee the worst market declines since the Great Depression, according to “Black Swan” author Nassim Taleb.
Universities teach mathematical theories such as the Black- Scholes model of pricing options that don’t express risk properly, Taleb said in a Bloomberg Radio interview. Options are derivatives that give the right but not the obligation to buy an underlying security at a set price and date.
“Recent events have proved that all risk management was wrong,” Taleb, a former options trader, said. “We need to do something drastic immediately to stop quantitative risk managers from inflicting more damage.”
Academic teaching resists change because tenured professors aren’t forced to adapt or subject to the same standards that the market imposes on Wall Street, Taleb said.
“People are learning the wrong thing,” he said. Rare and unforeseen events are known as “black swans,” after Taleb’s book, “The Black Swan: The Impact of the Highly Improbable.” It was published in May 2007, about three months before the credit crunch rocked global markets and led banks to announce almost $700 billion of asset writedowns and credit losses.
‘Bogus Matters’
“You have a business school establishment that’s completely disconnected from what’s going on” because it depends too greatly on equations, Taleb said. “We should learn to abandon these bogus matters, and instead of using a computer we should look at the world with the naked eye.”
Taleb, who once taught a graduate course on how models can fail in quantitative finance at New York University, had the biggest payday of his life during the stock market crash of Oct. 19, 1987, when his options exploded in value.
This year, investors advised by Taleb gained 50 percent or more this year as of Oct. 14 after his strategies for navigating big swings in share prices paid off amid the worst stock market in seven decades.
Universa Investments LP, the Santa Monica, California-based firm where Taleb is an adviser, has about $1 billion in accounts managed to hedge clients against big moves in financial markets. Returns for the year through Oct. 10 ranged as high as 110 percent, according to investor documents. The Standard & Poor’s 500 Index lost 39 percent in the same period.
Record Volatility
U.S. stock swings as measured by the Chicago Board Options Exchange Volatility Index, or VIX, rose to the highest in the 18- year-history of the gauge last month, reaching 80.06 on Oct. 27. The index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which tumbled 17 percent in October for its worst monthly drop since 1987.
Even the hedge-fund firm co-founded by Myron Scholes, who won the 1997 Nobel Prize in economics for his development of the options pricing model with Robert Merton, wasn’t immune to this year’s market turbulence.
Scholes’ Platinum Grove Asset Management LP temporarily stopped investor withdrawals from its biggest fund after it lost 29 percent in the first half of October. The decline left Platinum Grove Contingent Master fund with a 38 percent loss this year through Oct. 15, according to investors
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aW2ByfpGZflA
Business schools should teach empirical analysis and drop risk-management models that failed to foresee the worst market declines since the Great Depression, according to “Black Swan” author Nassim Taleb.
Universities teach mathematical theories such as the Black- Scholes model of pricing options that don’t express risk properly, Taleb said in a Bloomberg Radio interview. Options are derivatives that give the right but not the obligation to buy an underlying security at a set price and date.
“Recent events have proved that all risk management was wrong,” Taleb, a former options trader, said. “We need to do something drastic immediately to stop quantitative risk managers from inflicting more damage.”
Academic teaching resists change because tenured professors aren’t forced to adapt or subject to the same standards that the market imposes on Wall Street, Taleb said.
“People are learning the wrong thing,” he said. Rare and unforeseen events are known as “black swans,” after Taleb’s book, “The Black Swan: The Impact of the Highly Improbable.” It was published in May 2007, about three months before the credit crunch rocked global markets and led banks to announce almost $700 billion of asset writedowns and credit losses.
‘Bogus Matters’
“You have a business school establishment that’s completely disconnected from what’s going on” because it depends too greatly on equations, Taleb said. “We should learn to abandon these bogus matters, and instead of using a computer we should look at the world with the naked eye.”
Taleb, who once taught a graduate course on how models can fail in quantitative finance at New York University, had the biggest payday of his life during the stock market crash of Oct. 19, 1987, when his options exploded in value.
This year, investors advised by Taleb gained 50 percent or more this year as of Oct. 14 after his strategies for navigating big swings in share prices paid off amid the worst stock market in seven decades.
Universa Investments LP, the Santa Monica, California-based firm where Taleb is an adviser, has about $1 billion in accounts managed to hedge clients against big moves in financial markets. Returns for the year through Oct. 10 ranged as high as 110 percent, according to investor documents. The Standard & Poor’s 500 Index lost 39 percent in the same period.
Record Volatility
U.S. stock swings as measured by the Chicago Board Options Exchange Volatility Index, or VIX, rose to the highest in the 18- year-history of the gauge last month, reaching 80.06 on Oct. 27. The index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which tumbled 17 percent in October for its worst monthly drop since 1987.
Even the hedge-fund firm co-founded by Myron Scholes, who won the 1997 Nobel Prize in economics for his development of the options pricing model with Robert Merton, wasn’t immune to this year’s market turbulence.
Scholes’ Platinum Grove Asset Management LP temporarily stopped investor withdrawals from its biggest fund after it lost 29 percent in the first half of October. The decline left Platinum Grove Contingent Master fund with a 38 percent loss this year through Oct. 15, according to investors
