Economists Recieved Nobel Prizes in Economics for Causing Current Crisis

[KrazyHorse]

Originally posted by Kidicious


Why not?

edit: I'm talking about all derivatives pricing actually and the way their risk is evaluated.

Options are one specific class of derivatives. The Black-Scholes model is useful for options pricing. It is useful for certain other derivatives. It is not useful for pricing the type of derivatives that have gone to ****. You obviously think that all derivatives are equal. They are not. Specifically, well-understood exchange-traded derivatives like options are not equivalent to badly understood OTC derivatives.

[Kidlicious]

Originally posted by Asher


It's not gay unless there's penetration. Ask any frat boy.

Now you're definitely coming on to me. No means no!

[Asher]

You fail.

[Kidlicious]

Originally posted by KrazyHorse
Options are one specific class of derivatives. The Black-Scholes model is useful for options pricing. It is useful for certain other derivatives. It is not useful for pricing the type of derivatives that have gone to ****.

Not according to this.

Do you know of another model that is used to price them?

You obviously think that all derivatives are equal. They are not. Specifically, well-understood exchange-traded derivatives like options are not equivalent to badly understood OTC derivatives.

The only argument I have is how they are valued and what their risk assessment is according to the mathematical models.

[KrazyHorse]

Originally posted by Kidicious

Not according to this.

LOL. You ****.

The starting point is a key feature of the US mortgage market, namely that most loans are de facto or de jure ‘no recourse’. This means that the debtor cannot be held personally liable for the mortgage even if, after a foreclosure, the bank receives only a fraction of the total mortgage outstanding from the sale of the house.

With a ‘no recourse’ mortgage, the debtor effectively receives a virtual put option to ‘sell’ to the mortgage-issuer the house at the amount of the loan still outstanding. Mortgage lenders are ‘short’ this option, but this is not recognised in the balance sheets. In most cases, the balance sheets of the banks report mortgages at face value – at least for all those mortgages on which payments are still ongoing.

All RMBS, especially all securities based on low quality mortgages, should also take this put option into account in their pricing. It appears that this had not been done when these securities were issued. In particular it appears that the ratings agencies neglected this point completely when evaluating the complex products build on bundles of mortgages. A key input in banks balance sheets and the pricing of RMBS should thus have been a valuation of the put option given to US households.

His point is that the put option of jingle mail WAS NOT USED IN PRICING MBS.

So now you're blaming Black-Scholes for NOT being used?

[KrazyHorse]

To reiterate: MBS are fairly complex derivatives. The fact that one part of their valuation should involve the valuation of a put option DOES NOT MEAN that the MBS is an option. It simply means that the MBS is the sum of an option and some other derivatives. That man's article describes the fact that the value of the put option was not priced into valuations of MBS.

I'm glad you've come to the conclusion that Black-Scholes is not used widely enough, Kid.

[KrazyHorse]

Originally posted by Kidicious

The only argument I have is how they are valued and what their risk assessment is according to the mathematical models.

Mathematical models are not all equal. You ****.

[Kidlicious]

Originally posted by KrazyHorse


LOL. You ****.

The starting point is a key feature of the US mortgage market, namely that most loans are de facto or de jure ‘no recourse’. This means that the debtor cannot be held personally liable for the mortgage even if, after a foreclosure, the bank receives only a fraction of the total mortgage outstanding from the sale of the house.

With a ‘no recourse’ mortgage, the debtor effectively receives a virtual put option to ‘sell’ to the mortgage-issuer the house at the amount of the loan still outstanding. Mortgage lenders are ‘short’ this option, but this is not recognised in the balance sheets. In most cases, the balance sheets of the banks report mortgages at face value – at least for all those mortgages on which payments are still ongoing.

All RMBS, especially all securities based on low quality mortgages, should also take this put option into account in their pricing. It appears that this had not been done when these securities were issued. In particular it appears that the ratings agencies neglected this point completely when evaluating the complex products build on bundles of mortgages. A key input in banks balance sheets and the pricing of RMBS should thus have been a valuation of the put option given to US households.

His point is that the put option of jingle mail WAS NOT USED IN PRICING MBS.

So now you're blaming Black-Scholes for NOT being used?

He didn't say Black-Scholes wasn't used. He said the put option wasn't taken into consideration. That's a different issue. He also said that Black-Scholes is the usual method for valuing derivatives like these.

[Kidlicious]

Stop with the homo foreplay already.

[Kidlicious]

Originally posted by KrazyHorse


Mathematical models are not all equal. You ****.

There's nothing wrong with the math. The problem is the idiots who create them and use them. Like I said, the problem is economists.

[Vanguard]

Kidicious is right. The mathematics (Black-Scholes etc) are fundamentally useless. The idea that this is nothing more than a problem of "garbage in, garbage out" is incorrect.

Here's why:

Suppose that last year, instead of falling 10%, housing prices had instead risen by 10%. Would we then be in the same financial crisis that we are now?

No. Of course not. Everything would be fine. And the Black-Scholes values (or whatever equation used) would be correct for this year, instead of being off by nine standard deviations (or whatever).

In that case you would have "Garbage in, Correctness out". With the exact same inputs that result in "Garbage in, garbage out" for the year that actually happened, when home prices declined instead of rising.

This means that the mathematics are nonsense. Equations that compute the values of volatile derivatives in a market are supposed to account for all the risks to those values.

If they don't, then they are not equations about the values of derivatives. They are equations about the academic definitions of derivatives. Definitions that don't correspond to anything in the real world.

Why does anyone deserve a Nobel Prize for predicting the value of a made-up definition?

[Krill]

[KrazyHorse]

Originally posted by Kidicious


He didn't say Black-Scholes wasn't used. He said the put option wasn't taken into consideration. That's a different issue. He also said that Black-Scholes is the usual method for valuing derivatives like these.

Please provide me with a quote where he says that. There are two examples of the word "Scholes" in the article. Here are the quotes containing them:

In the abstract:

"A bit of logic and a straightforward application of the Black-Scholes formula suggests that if current expectations of house price declines are right, securities built on subprime mortgages might be close to worthless"

In the body:

"Applying the usual Black-Scholes formula to a typical subprime loan with an LTV ratio of 100% yields the result that the value of the put option embedded in the ‘no recourse’ feature is 26.8% of the loan"

Where does he say that Black Scholes is useful in valuing parts of the derivatives OTHER than the part which is equal to a put?

[KrazyHorse]

Originally posted by Vanguard
Kidicious is right. The mathematics (Black-Scholes etc) are fundamentally useless. The idea that this is nothing more than a problem of "garbage in, garbage out" is incorrect.

Here's why:

Suppose that last year, instead of falling 10%, housing prices had instead risen by 10%. Would we then be in the same financial crisis that we are now?

No. Of course not. Everything would be fine. And the Black-Scholes values (or whatever equation used) would be correct for this year, instead of being off by nine standard deviations (or whatever).

In that case you would have "Garbage in, Correctness out". With the exact same inputs that result in "Garbage in, garbage out" for the year that actually happened, when home prices declined instead of rising.

This means that the mathematics are nonsense. Equations that compute the values of volatile derivatives in a market are supposed to account for all the risks to those values.

If they don't, then they are not equations about the values of derivatives. They are equations about the academic definitions of derivatives. Definitions that don't correspond to anything in the real world.

Why does anyone deserve a Nobel Prize for predicting the value of a made-up definition?

You have started on your path to tardness. Congratulations.

[Kidlicious]

Like I said before. You are more than welcome to tell us how the assets are priced.