Domain Query: Of models and madness
Economics is pretty simple in a lot of ways, and cannot be modelled with bullshit models. I've taken looks at some of them econometrics models and forecasting stuff, looking at the maths en aw, and it be all cuckoo clock stuff, or at least to me. The future is too uncertain, too messy to model (unless it be something like bonds or something). Yous lads are using crazy shit like Monte Carlos no, or whats the story? Be interesting to sees, from a nerd perspective, what are the specifications of those kind of models. Possible future post ken?
- Markets are frictionless (i.e. no transaction costs, delays to transactions, "stickiness" in prices, etc.)
- The Law of One Price holds (basically this means that in a complete market, i.e. one in which every product either is unique or can be replicated in value by a portfolio of similar products, the price assigned to any given product is unique)
- There is no opportunity for arbitrage (risk-free profit)
- Every market participant has risk-neutral preferences
- The risk-free interest rate is constant
- The volatility of the underlying asset is constant
- Asset prices follow a "smooth" underlying distribution (I'll go in to this in more detail shortly)
where of course p = 0.5.