Black Scholes Merton and LTCM – Part 1

I have just watched BBC’s documentry about Black-Scholes (for the 10th time).

Black Scholes (BBC)

Every time I watch it i learn something new, mainly because each time my knowledge of the subject matter has significantly increased in between viewings.

The formula below is the fundamental BS equation (solution a la Merton)

My sister was asking me so why did they assume that the strategies the employed at LTCM will consistently return profits … I’m seriously pondering this. So far I believe that in the long run there startegies failed for several reasons but before we mention them it’s worth saying what these starts were. From general material like Wikipedia, one can deduce most pf the starts were based on mean reverting models (this is essentially the foundation for a pairs trading strategy which LTCM employed extensively.)

Reasons for the demise of LTCM:

• Assumed non stochastic rates
• Assumed constant volatility
• Failure of rationality
• Fundamental breakdown about the understanding of a pairs trading model.

In part 2 I would delve deeper into the fundamentals.

Even when the odds are against you

Happy New Year.

Was doing some work recently, and I suddenly lost motivation when I realized this was going to be very challenging. So I decided to take a break and started flipping through my old work then books then emails then and even text messages.

I found this picture:

When the going gets though the though get going

This mousy, probably even got hurt a few times trying to get the cheese. But see he’s back prepared with a helmet.

When I saw this I laughed, then I realized that even though I did not feel I could solve the challenge the first time, at least I will have eliminated one possibility.

Along with strength from the Lord, this quote by Thomas Edison summaries how I intend to tackle challenges this year:

“I have not failed. I’ve just found 10,000 ways that won’t work.”

The train will be departing platform 8

It’s 12.00 am and honestly I’m excited about the new idea’s that have been hatching. For all the faithfuls know one thing, Piroinno will not disappoint.

The innovation train is ready to roll

Over the past few months a lot has happened in my life let alone the world.

Where do I start …

I have since graduated from university and now work full time, at the moment. My instincts are to stay put for now.

Behind the scenes the innovation train has been loading up, and now honking for the gates to be open … Within the next few months expect a lot of blogging about this. Remind me if I forget.

In the world, we’ve seen and are currently experiencing a credit crunch. I’ve noticed that my money has less bang for the buck.

Please welcome me back with this short rant.

Regards

Blogged with the Flock Browser

Tags: innovationtrain,

Hilarious, laugh or die

Apple’s new phone

In case you missed it Apple recently announced their new iphone Apple iTouch Phone. Due out here in Europe in October retailling for about £250.

Gears of war Down? (Update #1)

Haven’t been able to log onto Gears of War online (versus), I think it’s down too along with the Taiwan internet connection.

Update #1: seems this down time is not limited to GoW, apart from voice and video chat all Xbox live games are inaccessable.

Blogged with Flock

 

A very random but interesting album

This is very random, but so is my taste of music.

After watching “Searching for the Wrong-Eyed Jesus” I have come to realise the power of the Harmonica and the Banjo (I was also amazed by negative and positive aspects of isolation). The soundtrack to the documentary is really worth listening to (at least buy it to support the artists)

The console wars – part 2

James Surowiecki an editor/contributor of the New Yorker belives that the console war has claimed it’s forst victim (in a good way) and that Nintendo would be content with third place. my comments to follow shortly.

Why Nintendo needs games with more depth

Judging by my recent posts you can tell that I have some Nintendo Fanboy genes. Anyway I read an article on the BBC about the Wii, which got me thinking about what Nintendo needs in other to maintain momentum. Physics 101- Newtons law of motion states that a body would continue in its state of motion unless an external unbalanced force acts on it – keep that in mind for now. Nintendo makes games that everyone  from all works of life can immediately pick up and start playing – Nintendo makes the best games period.

But this is the reason why most games can lack depth.

Going back to what I said earlier about momentum, Nintendo has momentum for three main reasons:

1. Recent sales figures and tests show that Nintendo has successfully tapped the non gaming demographic and bringing them in by the trolley loads.
2. The Wii controls bring a new angle to gaming even hard core non Nintendo gamers have shown interest in the console.
3. At £179 for console and a game – the price is right.

We’ve all heard about the wonderful launch the Wii had compared to the PS3, plus the 30 launch titles including the best game ever made – Zelda twilight princess. It’s like Nintendo have been dealt an upper hand, the gamecube was a good system but lack of third party support killed the system, in fact I cannot remember any third party game that I liked on the gamecube apart from resident evil. Nintendo need more exclusives from other third party studio’s especially the likes of Capcom and Ubisoft.

Nintendo scares me when the say things like we are going in a different direction by not trying to compete with Sony and Microsoft, there is no such thing because a competitor is a competitor. This is the gaming industry were games determine which console gets more playing time. I agree with the philosophy of not relying on graphics alone to determine the enjoyability of a console, in the long run this benchmarking criteria is flawed (it’s like using the core speed of a cpu to judge it’s performance). However pretending that you are in a league of your own is like lying to yourself (Iraqi minister of info) about the inevitable.

Nintendo also need a solid online platform. Wii sports would be a major major blast if I could play with other people online. Who knows where my golf skills might take me, be scared Tiger.

Bottom line is to maintain this momentum:

1. Nintendo needs more third party support (not ports) and exclusives.
2. Nintendo needs a solid online gaming system like and even better than XBOX live.
3. Keep the good games coming.

Blogged with Flock