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Guest Post: A Synthetic Equity Decomposition Puzzle
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The person who created that document is an agent of the devil.
http://www.youtube.com/watch?v=CbiPDSxFgd8
http://www.youtube.com/watch?v=HY3NQUoT89k
sooooooooo... i am back in cds / swaps of any sort becuase the long term trend is upward? insurance is doing well and if we are to float aig again we have to start some where...
good work, thanks!
Pardon, but what the fuck are you talking about?
Holy smoke. That is what the author of this piece was on.
Nothing synthetic either.
Maybe the only thing that decomposed is his brain.
Fascinating! I feel en-lightened.
ORI
http://aadivaahan.wordpress.com/2011/01/21/accidental-lives/
Whoa! Outstanding. Ever been in a read where you understand every word as you go, yet get to the end and, buzzbrained and befuddled, can say only...
Whoa! Outstanding. Ever been in a read....
I've forgotten more math than most people ever study.
How about all you passive investment wankers and stuffed suit fantasy quants spend a day actually working and making something with your own two hands.
Its enough that the time value of money makes the world go round.
Now more of this ... Thanks The Onion.
Doesn't matter. You're all going downtown to Chinatown.
I guess I should have said you are correct... and you are...
But, insurance.. synthetic... is a game no longer popular with the lil people... thusly over the long term, the dumb money will stay away... thusly, the market that is synthetic insurance... will fail to realize meaningful growth. competing with those pretty etf's, bond's and of course the very real run up from 1275... back slide 1100, buy.. ride to 1300 get off and so on... math is logical, there is a lot more to making money than logic... i promise.
Who the hell gives you and the others here the knowledge and authority to say what has value and what has none?
If you, a single person, is allowed to be the deciding expert on what work I should do and how it is valued then I choose otherwise. Your opinon is no better than mine.
that is the truth and an absolute fact...
megatron wankster math here for sure.
"risk factors are not orthoganal" (wanker )
My square is really a cube if it is not orthogonal (accurate)
Rendered orthographicly my cube appears to be a square (Accurate)
Blackscholes is bullshit too.
50% gains in MUB calls in one hour on fri is the result of WANKSTER MATH
Fuckin goofballs who reality can be summed up with four or five variables and a couple of WRONG and FUCKED geometry references.
PHD in math = Punk Hasnt Done shit.
Head in Satan's anus:
This post is about determining if an idea proposed is sound or not. There's math in there, and there's intuition that I bet you could help with if you put your mind to it.
I guess the issue is this: do we need new ideas or not?
You can't put the genii back in the bottle. Credit risk is going nowhere. Neither, it seems, are CDS.
So we can go on never thinking about the hows and whys of things, even though we know there are things we need to explain and understand.
Let's all just cower in fear and pretend that we have problems the likes of which no one on earth has ever seen or felt before, even though we all damn well know this isn't true.
Let's blame the quants for everything.
genius jim. The proposed math solution is USELESS
"PHD in math = Punk Hasnt Done shit."
You guys knock off the funny before you put the professionals out of business.
Wow, thanks for taking me back 35 years to the first time I tried to read the Wall Street Journal- the words were English, but I had absolutely NO IDEA what they said. HA!
throw this math out and just track the lobbyists and then you'll know where the market is heading
Zero Hedge: putting the "frack" back in "fractal".
JM, you really need to be more clear on your descriptions. You are all over the place; like you're posting drunk, e.g. "BS-ariffic"
FYI, if X_t is the random variable that follow a SDE for a stock PRICE, then it is NOT a martingale, but a submartingale. This is due to positive drift.
Appreciate your clarification you're quite right. BTW, is a submartingale a semimartingale, or are they mutually exclusive?
If you are talking about the notation, yeah, Ty's word processor doesn't have the fonts to load the equations right... I was afraid of that. On the other hand, I thought "Black-Scholes-ariffic" was clear and humorous in a geeky way... I respect that you like greater precision... it came out of a notebook of unsolved problems I've been keeping for years.
Cool new avatar.
I see wall street math hasn't changed much.
Problem: How can I collect $1 each from 10 people and end up with $12?
Solution: Add enough complexity and assumptions and we can mark it up enough to keep everyone in Ferraris.
How could it be that a mathematical model, in which we abstract the rates of change for every relationship into single vectors, fails to grant us the key to the universe?
Tomorrow impacts the events of today as strongly as yesterday.
Once you've worked out how to collect the data for the future -> past trends, you have no puzzle. We don't call it forecasting when we're discussing what printed yesterday.
This is not a joke. Einstein proved some interesting stuff. Space and time are just two ways of discussing the same system of relations. Financiers need to get caught up on that. It's old news.
Here's what I'm saying. It may be wrong, but here it is.
The only reason why you would buy a stock is because you think the market is wrong about what the price says of its future prospects. You think the market is wrong and you are right.
What if you can decompose the stock price into smaller parts? This allows you to say how the stock price is wrong about its future prospects.
All these approximating instruments... the dividend swap, the varaince swap, etc. All allow you to take a position against the market.
They float until you hit the bid, then there are fixed for you. So if you think one of the factors will be (hopefully monotonically) higher over a fixed contract term, then you take the float side, if under you take the bid on the fixed side.
The point is not to exactly replicate the stock price, but to be enabled to take a surgical view on what you think is wrong with the stock price. And things will always be wrong. Bases can exist based solely on what everyone else does, only to have that basis trade evaporate when correlations reset.
Make sense?
Very interesting framework, though obviously a huge amount of details need to be worked out.
Did you imply that the "drift+diffusion" process is the same for "revenue expectation + book value + credit risk"? Intuitively they're definitely not. In fact I don't like the "drift/diffusion/jump" language in that they imply fundamentally wrong ways to model the dynamics. I don't know what the right way is, obviously. Not yet.
Conceptually, how do you plan to model the "cross terms"? If you assume constant correlation, I don't know how far it'll carry you. But if not constant, then what -- piece-wise constant with jumps of stochastic duration and magnitude? Another drift+diffusion process? It gets very hairy very fast.
No. But the only way I can get my hands around it right now is to figure see if the concept makes sense, calculate numerical point estimates for each decomposition factor over time, and then check how well these aggregated estimates fit reality. If I saw promise, then I would try to determine a law of motion for those dividend swaps. And reading Doob again.
As far as modeling goes, it seems reasonable that dividends are the second derivative of revenues, but determining a law of motion is not so easy. Frankly, I'm not sure where to even start with that. I don't have a lot resources like the really big phynancial labworks do.
I know just saying a "multiplicative process" isn't good enough... this is why the defining section was called "slight of hand". A coupling method seems a possible approach because you can build sandwich theorems which seem a natural way to do this thing.
I alluded to that correlation problem at the beginning. This problem is, I think, bigger than just here. It is inherent in all financial models. It is the key to consistent foundations, which I think don't really exists yet. Intuitively, "things work until they don't" just means "when groupthink turns based on some catalyst." Interacting particle systems models that borrow from physics may work, but I know little about the properties of these systems though.
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