Black-Scholes, LTCM and Where Mathematics can Fail to Model the Markets

The 1970’s and 80’s signaled the rise of financial mathematics as a powerful tool to make constant returns from financial markets. Fischer Black and Myron Scholes had planted the seeds for what was going to be the foundation of derivatives pricing for the years to follow in their 1973 paper: The Black-Scholes Model.

For years since then, financial mathematician, traders and quants worked on tweaking this formula to make it model more closely the realities of the markets.

In 1997, Myron Scholes was awarded the Nobel prize in Economics for his work, along with his colleague Robert C. Merton. Both of them then decided to make the leap from academia to the markets, and sat on the board of Long Term Capital Management (LTCM) which made returns as high as 40% in its first few years.

The following videos recount the tragic story of LTCM, its rize to fame and catastrophic failure, and open the debate around financial mathematics modeling.

So what is next after financial mathematics then? Artificial Intelligence?

 

 

 

 

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One Response to Black-Scholes, LTCM and Where Mathematics can Fail to Model the Markets

  1. omar@adshock.com.au says:

    So LTCM’s horrible performance in 1998 you did not mention ūüėČ

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