Ali’s blog

Mostly quant stuff with occasional digressions

The prognosis for financial markets

Posted by alifinmath on January 14, 2008

My prognosis is financial markets won’t survive. We’ll move to some sort of barter system. Let me argue my case. The global financial market — centered in hubs like NYC, London, and Hong Kong — is  relatively recently born: it was removing the anchor of a fixed rate for gold at $38 and the new era of floating-exchange rates that ushered in the new world of global finance and financial skullduggery (er… I meant engineering). I don’t think this make-believe world is sustainable. Every era of fiat currency in human history has come to a crashing end.

In the new world, there will be no need for financial engineers. Ito’s lemma and Brownian motion will survive: it’s an interesting piece of mathematics, with applications in physics and biology. Monte Carlo methods will survive for the same reason. Numerical solutions of PDEs will survive. Black-Scholes, volatility smiles, interest rate models, and so on, will get flushed down the loo.


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