April 25, 2024
Mathematical Finance has made Nobel Prize winning advances but there is more work to be done. Historical mathematical artifacts need to be replaced by a rigorous theory allowing more faithful modelling of what happens in the real world.
It is time to develop a theory that can model what practitioners actually do.
After the market crash in 1929 the SEC was established to prevent market manipulation. The first commissoner was (Joseph Kenedy Sr)[https://en.wikipedia.org/wiki/Joseph_P._Kennedy_Sr] who established investor confidence by eliminating fraud and insider information by establishing regulations requiring companies to make their financial records public to potential investors.
He was an expert in that having been involved with insider trading at Hayden, Stone, & Co., a progenitor to Shearson/American Express.
As with all after-the-fact regulation, this was only partially successful. Trust is the most valuable commodity in the world. It cannot be manufactured and can evaporate in an instant.
Inside information a terrific way of making money.
Prediction is very difficult, especially if it’s about the future - Niels Bohr
Unless you can cheat.
Graham and Todd initiated a systematic and objective analysis of investments.
Publicly traded companies were required to provide
Markowitz. And Roy. Maximize return, minimize variance. Depends on historical data. p Cite random variable paper.
Did Graham-Todd agree that Markowitz used market prices to avoid fundamental research?
Black-Merton Scholes
Stephen Ross
Linzberger …
Continuous time.
Implicit assumptions. Optimization. Self-financing.
Lack of knobs.
Bid-ask spread.
Entities.
Dynamic hedging and cash flows.
Clear trajectory.
Monte Carlo simulation.
Realtime analytics.
Pivot tables. Reporting.