I like to think of models as a Gedankenexperiments-the imaginary experiments physicists used to try to think about something they couldn't do, like sitting on the edge of a light beam and travelling at the speed of light.
I think that's what models are good for in finance. In most cases the world doesn't really behave in exactly the way as the model you've constructed. You're trying to make a poor approximation of reality, though it has big advantages. You can ask, "What happens if volatility goes up or interest rates go down?" It allows you to stress-test your view of the world in some way and then come up with a price based on what you can understand.
This is Argyn's blog. I comment on topics of my interests such as software, math, finance, and music. Also, I write about local events in Northern Virginia, USA and all things related to Kazakhstan
Wednesday, February 14, 2007
I like his way of thinking.
Posted by Argyn at 9:01 PM