Follow up on "The Misbehavior of Markets" by Benoit Mandelbrot

DiogoPF

New Member
Hello,

So i recently read The Misbehavior of Martets by Maldebrot and would like to know of a few recommendations of what to read next. I really liked that the book gives you an overview of the most important models in Finance and their shortcomings. I tried reading a paper they mention in the book "A Multifractal Model of Asset Returns", but I realize that I am lacking a lot of intelectual baggage to understand even the introduction. I am a student in a Masters of Financial Mathematics so eventually I will have to do my Thesis and I thought that doing some reading on my own, on topics I find interesting, is a good point to start.

So, any suggestions? Thanks :)
 

vertigo

Member
i am split in two minds - mandelbrot was a genius and a lovely man but his ideas on finance are worse than dog shit - because at least you can see dog shit for what it is (smelly, you get away from it and never look at it again), mandelbrot's work is like chocolate cake with shit inside - it looks good but it will take a while to realise that it is worse than useless - it is dangerous, not practical at all and more importantly wrong in practice.

mandelbrot's ideas are useless when you work in the risk neutral measure - discounted asset prices need to be martingales (more generally, local martingales, or even more general, sigma martingales) and the kind of processes he looks at (fractional brownian motion, with h !=0.5) are not semi-martingales, therefore they cannot be used for pricing derivatives on assets. for all his genius, he does not discuss this huge limitation in his work. mathematicians and academics (remember, finance academics are failures and should never be listened to, they are like a cancer) tried hard to make his ideas into a theory - they invented a process called the Wick product, only for tomas bjork to show that it was complete dog shit - you can simultaneously be long and short on a portfolio when you work with the Wick product! so his ideas are useless for pricing derivatives.

they are even more dangerous to use in the statistical measure - but that is more complicated to explain.

most important models in finance? easier to specify it by asset class

equities and fx spot rates

black scholes model
black scholes model with local volatility model (dupire)
black scholes model with stochastic volatility model (heston model)
black scholes mdoel with BOTH local volatility and stochastic volatility model (mix of the previous two)

interest rates (and inflation rates, forward rates, future rates, ...)

bachelier model
black 76 model
sabr model
hjm class models (this usually means the hull white short rate model)
libor market model

the following books explain most of the above models




and will contain references to other books
 
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