Comments on Rick Bookstaber: We Need Open Derivative Models

Open source valuation models should not only impro...

2009-10-27T09:59:45.685-04:00

Open source valuation models should not only improve transparency, but also improve the quality of the modeling techniques, allowing anyone with abit of quantitative skills to challenge the underlying assumptions.
It should also improve the consistency and comparability of valuations across firms.

standardization of complex derivatives only gives ...

2009-10-19T02:04:21.071-04:00

standardization of complex derivatives only gives people a false sense of security. we can't price reliably most of those complex products no matter what model we use. doing the same as the industry standard is a great ass-covering exercise for managers involved, but that's about all.
I run a book that is marked at "consensus" however you can't find a bid at all, even miles below that consensus level and in small quantities. but that doesn't bother anybody, we are "marked to market", nothing can be blamed on the managers. standardizing what we cannot price is dangerous stuff.

Hmmm. Perhaps the current slump in the finance sec...

2009-10-12T12:57:00.126-04:00

Hmmm. Perhaps the current slump in the finance sector and the trend toward grad school for today's 20-somethings without jobs will help here. It would be interesting to investigate the cycle of academia-vs-industry as Wall Street becomes more and less lucrative. The current crop of grad students may very well decide to stay in academia, providing the thought leadership we need in this area.

The problem with open derivative models, on the ot...

2009-10-12T10:40:31.619-04:00

The problem with open derivative models, on the other hand, is their vulnerability to being gamed unless they are extremely restrictive. In particular, they should only allow standardised derivatives traded on exchanges, whose behaviours are designed in and known beforehand. Otherwise, it would not take long before customised derivatives that look good on the model but are actually extremely toxic start getting issued. Just look at what happened with VaR, a somewhat open model, as an example of what might go wrong.

On the other hand, if the model isn't open the...

2009-10-12T00:03:07.651-04:00

On the other hand, if the model isn't open then it's harder to game the system.

(Right up until the point of your first ex-BR employee hire)