Long-Term Capital Management: Difference between revisions

Long-Term Capital Management (view source)

1,412 bytes added , 31 August 2020

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 See also: Hubris.
+LTCM was a [[hedge fund]], founded in 1993, and stuffed to the gunwhales with splendid brainboxes and Nobel prize-winners, including at least one of the team who “solved” the problem of how to accurately price options with the [[Black-Scholes option pricing model]]. LTCM used their braininess, and the [[Bl;ack-Scholes]] model, to engage in [[leveraged]] [[arbitrage]], ultimately doing the world the large favour of testing the Black-Scholes model to destruction. Alas, it destroyed their fund, and nearly took the financial system with it. But at least we now know that the Black Scholes model is only reliable when you don’t really need it, in times of relative market calm, so no-one uses it to manage positions that have significant tail risk any more.<ref>You believe this, don’t you?</ref>
+Then those “[[ten sigma event|ten-sigma” events]] — like, ooooh, say the correlation of a Russian government default with a spike in the price of all other G20 Treasury securities, just to pick something at random — that should, in the world of [[normal distribution]]s, happen only once in every 1 x 10<sub>24</sup> times — say, every hundred million years or so — but, since investment decisions are ''not'', even remotely independent events, happened once— and only needed to happen once, to blow [[Long Term Capital Management]] and much of the market to smithereens — in four years.
 {{sa}}