Epstein Secrets

cs/abstracts.html Clementi F, Gallegati M, 2005. Power law tails in the Italian personal income distribu

The research on liquidity suggests two implications for finance that are both quite profound, the first area relates to the pricing models based on Black-Scholes, the second to the pricing of shares under the CAPM. Almost all modern option pricing theory is based on the Black-Scholes model, or other closely-

sible), then it may be that measurement of liquidity might be able to give good timely measures for current volatility that can be used directly in Black-Scholes models; rather than the current practice of imputing from historical volatility. A second significant area of interest for the application of liqui

iew some background on power law distributions. Power laws are deeply beloved of theoretical physicists

ists working in finance have not only accepted this, but they have built more and more baroque models on these flimsy foundations. The trouble with Black-Scholes is that it works very well, except when it doesn't. This basic flaw has been pointed out from Mandlebrot onwards, to date with no notice taken. Thi

10/23/00 V(x) P(x) (p+D)Inx Infinite slope Power law — 1 /x**(l+p/D) „-- Figure 1 Schematic of th

uctuations. Their continued use seems to emanate from the development of the Ito stochastic calculus that facilitated the development of the famous Black-Scholes equation used to model financial derivatives. Conversely the fitting of stock fluctuations by Levy distributions overestimates the extent of the fl