Negative Rates Are Rewriting the Rules of Modern Finance

Re:Negative Rates Are Rewriting the Rules of Modern Finance by avvt4avaw on Monday September 30, 2019 @11:57AM (#21116751)

I worked in an investment bank (Barclays Capital) in 2008, and at the time we were already developing models which could handle negative interest rates. The idea that this is somehow a new problem that has "broken the pillars of modern finance" is bizarre.

[ Parent | on HN ]

Re:Negative Rates Are Rewriting the Rules of Modern Finance by lucozade on Monday September 30, 2019 @12:47PM (#21117248)

The vanilla European swaptions market has always quoted wrt the Black model. If you strip out the hyperbole, I think this article is suggesting that they're looking for a cheap and cheerful model that accepts negative forwards.

It's somewhat orthogonal to how financial organisations actually fair value their rates volatility. All the market makers had to move away from log normal vols years ago as negative forwards have been around for a long time in other currencies.

[ Parent | on HN ]

Re:Negative Rates Are Rewriting the Rules of Modern Finance by rolltiide on Monday September 30, 2019 @12:03PM (#21116816)

As the article states, this is more about getting two people to agree on the price of illiquid derivatives

So you have your counterparty on the phone or in group chat and you arent using the same formulas in the same way then its difficult to get same pricing

[ Parent | on HN ]

Re:Negative Rates Are Rewriting the Rules of Modern Finance by frausto on Monday September 30, 2019 @01:11PM (#21117478)

That's a good way to put it. As my economics professors liked to point out, Black-Scholes was a self-fulfilling prophecy in that the success of the model was determined by the fact that everyone was using it (or some variation of it) to price derivatives.

If it had never been published would it still have been as accurate? Who knows.

When you dive deep it's easy to think of economics in terms of math and forget the fact that, unlike physics, it is a social field and there is no right and wrong aside from what people agree on.

[ Parent | on HN ]

Re:Negative Rates Are Rewriting the Rules of Modern Finance by alfiedotwtf on Monday September 30, 2019 @08:23PM (#21120902)

> If it had never been published would it still have been as accurate? Who knows.

I think if prices didn’t follow the model, there will be arbitrage opportunities either in the options or the underlying.

[ Parent | on HN ]

Re:Negative Rates Are Rewriting the Rules of Modern Finance by gbronner on Monday September 30, 2019 @12:56PM (#21117338)

One of the key problems with HW was that rates could go negative, and quite negative -- this was considered in 01/02 if not before.

[ Parent | on HN ]