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bearish
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Re: Chatroom

August 14th, 2022, 12:37 pm

Of course, now we know that the proper discount rate to apply is the return on the (dynamic) portfolio of the stock and the bond that a) maximizes the expected growth rate and, equivalently, b) makes the discounted stock and bond prices martingales under P.
 
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tagoma
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Re: Chatroom

August 14th, 2022, 6:11 pm

thank you bearish.
 
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DavidJN
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Re: Chatroom

August 15th, 2022, 3:19 am

If memory serves me right, he was applying a pretty standard discounted expected cash flow argument to Samuelson’s lognormal stock price model to find the present value of the option. That gives you the right general shape of the resulting valuation formula, but with a risk adjusted discount rate that is hard to determine.
To frame an option pricing model requiring (or, more practically, worked in reverse, implying) a risky discount rate requires imposing some restrictions on utility preferences (as per Rubinstein, Ross, and Carr) or an asset pricing model (e.g. CAPM, APT). I took the latter approach in the late 1980’s, as I was suspicious of aggregating utility from the small to the large.
 
An interesting practical problem is that a formulation with risky discount rates introduces a second unobservable into the valuation equation, which complicates things. Joint estimation of implied volatility and expected return from the same data is possible but messy. I used a 2-step procedure – first imply Black-world vols, and then use that vol in the risky discount rate option model to back out expected return from option price.
 
A related question if you would humour me – within the assumptions of the model, is the usual risk-neutral Black Scholes implied volatility an unbiased estimate of real world vol, or is somehow affected by the risk-neutral valuation? I vote for the former.
 
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Marsden
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Re: Chatroom

August 15th, 2022, 11:48 am

A related question if you would humour me – within the assumptions of the model, is the usual risk-neutral Black Scholes implied volatility an unbiased estimate of real world vol, or is somehow affected by the risk-neutral valuation? I vote for the former.
Within the assumptions of the model -- which include the ability to make instantaneous, costless trades -- Black-Scholes implied volatility is an unbiased estimate of real world volatility.
 
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bearish
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Re: Chatroom

August 15th, 2022, 4:44 pm

This is true, but in a slightly trivial sense: within the assumptions of the model, real world volatility is a constant and the model implied volatility will equal this constant. Furthermore, observing a time series of prices over an arbitrarily short time period, if sampled with sufficient frequency, will reveal this volatility.
 
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Alan
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Re: Chatroom

August 16th, 2022, 7:12 pm

If memory serves me right, he was applying a pretty standard discounted expected cash flow argument to Samuelson’s lognormal stock price model to find the present value of the option. That gives you the right general shape of the resulting valuation formula, but with a risk adjusted discount rate that is hard to determine.
To frame an option pricing model requiring (or, more practically, worked in reverse, implying) a risky discount rate requires imposing some restrictions on utility preferences (as per Rubinstein, Ross, and Carr) or an asset pricing model (e.g. CAPM, APT). I took the latter approach in the late 1980’s, as I was suspicious of aggregating utility from the small to the large.
 
An interesting practical problem is that a formulation with risky discount rates introduces a second unobservable into the valuation equation, which complicates things. Joint estimation of implied volatility and expected return from the same data is possible but messy. I used a 2-step procedure – first imply Black-world vols, and then use that vol in the risky discount rate option model to back out expected return from option price.
 
A related question if you would humour me – within the assumptions of the model, is the usual risk-neutral Black Scholes implied volatility an unbiased estimate of real world vol, or is somehow affected by the risk-neutral valuation? I vote for the former.
It's not clear to me that such a two-parameter model exists in continuous-time, rendering the arguments about the vol suspect. What exactly are the assumptions of the model?
 
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tagoma
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Re: Chatroom

December 5th, 2022, 8:03 pm

Hello. Is there that End od The Year Science Quizz put together by I don't remember what office in the Netherlands this year? And are we in?
 
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Paul
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Joined: July 20th, 2001, 3:28 pm

Re: Chatroom

December 5th, 2022, 9:11 pm

I don’t know.

There was also the GCHQ (spies) one.

If you find something…
 
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Cuchulainn
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Re: Chatroom

December 6th, 2022, 4:19 pm

Hello. Is there that End od The Year Science Quizz put together by I don't remember what office in the Netherlands this year? And are we in?
No. it was considered too elitist. 
And TV show, it was as boring as hell, said my mother-in-law, can't fool her.
We Dutch just want to have fun. 
They sought it with thimbles, they sought it with care; They pursued it with forks and hope; They threatened its life with a railway-share; They charmed it with smiles and soap.
 
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tagoma
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Re: Chatroom

December 6th, 2022, 6:39 pm

Hello. Is there that End od The Year Science Quizz put together by I don't remember what office in the Netherlands this year? And are we in?
No. it was considered too elitist. 
And TV show, it was as boring as hell, said my mother-in-law, can't fool her.
We Dutch just want to have fun. 


We Dutch just want to have fun.


Remnants of the times when the Netherlands was a French colony, I assume.
 
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Cuchulainn
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Re: Chatroom

December 6th, 2022, 9:11 pm

Ja, Old habits die hard.
They sought it with thimbles, they sought it with care; They pursued it with forks and hope; They threatened its life with a railway-share; They charmed it with smiles and soap.
 
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Cuchulainn
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Re: Chatroom

December 6th, 2022, 9:17 pm

And yesterday, Sinterklaas
Same melody as Belgie/Luxembourg, different lyrics.
They sought it with thimbles, they sought it with care; They pursued it with forks and hope; They threatened its life with a railway-share; They charmed it with smiles and soap.
 
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tagoma
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Re: Chatroom

December 11th, 2022, 3:08 pm

Probably a trivial question for most of you.
Do you know what these things are?



Image
 
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Alan
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Re: Chatroom

December 11th, 2022, 8:04 pm

teleprompters
 
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tagoma
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Re: Chatroom

December 11th, 2022, 9:00 pm

teleprompters
thank you Sir.
I wasn't a 100% sure.