When it's all over

hector · Post by **hector** » Fri Oct 10, 2008 1:14 pm

When it's all over and the dust has settled on this mess, we'll have some new data for our models (mainly rather large downward jumps), which we will take into consideration when trying to model asset price dynamics in the future. I guess the maths won't change (sde/pde), just the assumptions that go into our models. Wow, how things change!

FDAXHunter · Post by **FDAXHunter** » Fri Oct 10, 2008 1:17 pm

Well. Hm. I guess that means that you assumed that "large downward jumps" won't happen?

I think you should change your statement to "Wow, how things change.... for some of us".

hector · Post by **hector** » Fri Oct 10, 2008 1:33 pm

OK, but P(large downward happening) = 100%, in hindsight. Those who saw this cleaned up. Those who did not (vast majority) are screwed.

FDAXHunter · Post by **FDAXHunter** » Fri Oct 10, 2008 1:48 pm

Yes, 21 years is such an awfully long time, isn't it?

hector · Post by **hector** » Fri Oct 10, 2008 2:16 pm

I can only agree, fdax.

Razor · Post by **Razor** » Fri Oct 10, 2008 2:34 pm

>OK, but P(large downward happening) = 100%, in hindsight.

Where can I find out more about this hindsight probability theory that you speak of? Sounds useful.

hector · Post by **hector** » Fri Oct 10, 2008 4:33 pm

What I mean is that if you studied the data along with the assumptions, you would have predicted this happening. After all, it is happening. Some did, like Paulsons, and made an absolute fortune. Most didn't, like most of the world's banks, so it would seem... oh well.

mib · Post by **mib** » Fri Oct 10, 2008 5:09 pm

I do not think the large stresses are the biggest surprise of the last months. What about negative gilt-swaps spread in long term maturities? VOW GE negative correlation to equities? Negative basis CDS trades? Cross currency basis swaps far from 0? 1m/6m basis swap at 30+... Many things will need to change in many models.

Nonius · Post by **Nonius** » Sat Oct 11, 2008 8:51 am

P(large downward happening) = 100%, in hindsight

this makes absolutely no sense. what exactly do you mean by the statement?

conditioned on a large downward thing happening already, the probability thtat in the future it will happen again is 100%? in what time? shoudl the probability of a "large downward happening" have been 100% before it happened? on the other hand, it's vacuously true that the probability that something happened, conditioned on that it happened, is 100%. is this what you mean, by saying "in hindsight"?

jungle · Post by **jungle** » Sat Oct 11, 2008 9:15 pm

Please can we move this thread to the trashcan, where it belongs?