tag:blogger.com,1999:blog-5433839636644874439.post5392872755914025184..comments2024-03-04T13:37:11.022+00:00Comments on Canadian Financial DIY: Book Review: Capital Ideas by Peter BernsteinCanadianInvestorhttp://www.blogger.com/profile/05645767559302303541noreply@blogger.comBlogger6125tag:blogger.com,1999:blog-5433839636644874439.post-74679641551419469332007-06-05T03:14:00.000+00:002007-06-05T03:14:00.000+00:00I learned the CRR model too - it's a simplified ve...I learned the CRR model too - it's a simplified version of the B-S model (it involves pricing binary options that are valued 1 or 0 at expiry).<BR/><BR/>Funny, I just made that point on a finance forum - quants may be in high demand, but they're only working with models at the end of the day, and those models are only so close to reality, and reality can change on them at any time. It's why companies like Barclay's has their quants completely revise their models all the time.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-56838557743026594732007-06-04T10:20:00.000+00:002007-06-04T10:20:00.000+00:00Investoid, you may be too modest about your level ...Investoid, you may be too modest about your level of knowledge. <BR/><BR/>Bernstein mentions in one sentence the Cox-Ross-Rubinstein option pricing model published in 1979 but doesn't discuss it in comparison to Black-Scholes. He also devotes a paragraph to Mandelbrot and the chaos theory. I can imagine a writer so well informed as Bernstein (that's the milieu he came out of and still publishes research about) would have had a tremendous problem deciding what to put in and what to leave out. There could be so much more. One must also keep in mind that this is a history book not a finance book. It won't make one a better investor per se.<BR/><BR/>Funny how all those math PhDs did not keep BMO from losing $680 million in commodity trading. Few people, except perhaps other math PhDs at other banks who took advantage to eat their lunch, can tell when they got it wrong ... well, everyone can tell afterwards when the spectacular mess happens. Guess that's why the market is quite efficient, the smart are squashing the ignorant constantly.CanadianInvestorhttps://www.blogger.com/profile/05645767559302303541noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-29525667670121019182007-06-04T01:36:00.000+00:002007-06-04T01:36:00.000+00:00I share Mike's sentiments.I hope that more than a ...I share Mike's sentiments.<BR/><BR/>I hope that more than a few thousand people know how to derive the B-S model - otherwise I'm in pretty exclusive company and I only have limited post-grad math knowledge.<BR/><BR/>The problem with the Black-Scholes formula is in its assumptions. It assumes constant volatility as well as log-normal distributed returns, both of which have been proven false for most of the securities whose derivatives are priced using B-S. By the way, most modern financial theory is based on similar assumptions, which is part of the reason such theories have not mitigated risk as much as one would have thought.<BR/><BR/>While researchers haven't conclusively locked down an accurate model depicting the randomness of stock returns, there has been some advanced on many fronts, including fractals, chaos theory and nonlinear filtering. This is part of the reason why quant shops are gobbling up Math PhD's - so they can take advantage of mispricings due to the use of an inappropriate model.<BR/><BR/>Nonetheless, this book sounds like it was a good read.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-16628045689861469872007-06-04T00:03:00.000+00:002007-06-04T00:03:00.000+00:00Thanks Mike for the sentiment. She was a wonderful...Thanks Mike for the sentiment. She was a wonderful woman whom I was privileged to know and share many happy years with. She didn't deserve to leave us so soon but life isn't always fair. Her legacy is, along with scientific papers, our children. <BR/><BR/>Luc, I keep waiting for the Amazon book selector to adapt itself and automatically list a link to the books I review but I guess it isn't that sophisticated and has not done that so I may yet do the manual link.CanadianInvestorhttps://www.blogger.com/profile/05645767559302303541noreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-30941966604090672352007-06-03T23:21:00.000+00:002007-06-03T23:21:00.000+00:00Great review.Sorry to hear that your wife is not a...Great review.<BR/><BR/>Sorry to hear that your wife is not around.<BR/><BR/>MikeAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-5433839636644874439.post-45717051029882956022007-06-03T19:54:00.000+00:002007-06-03T19:54:00.000+00:00Thank you for the review.I suggest that you provid...Thank you for the review.<BR/>I suggest that you provide a link to the book. As an Amazon affiliate you could make some coffee change.Luchttps://www.blogger.com/profile/03096874661809555763noreply@blogger.com