Week InReview: July 28, 2017

Libor, Society and the Nature of Finance - "For decades Libor's function hasn't been to be an accurate representation of bank's overnight funding costs, but to be a number that people could plug into their spreadsheets to price derivatives and other products. "Aside from the morality of actively lying, the financial system is obviously better off with a 'fake' Libor than with no Libor. It's much more important to the financial system that there be some interest rate number that everyone agree to use as 'the interest rate' than that number be an accurate representation of what it represents itself to be. " not a 'bug' but a 'feature' since finance is a way of managing promises about the future, which are inherently unpredictable. I think it was Merton who joked that it wasn't that everyone used his options pricing model because it was accurate, but that it was accurate because everyone used it. There is no 'rational' way to price options, but the financial system is made much better off by everyone pretending that Black-Scholes is a rational way of pricing options."
Pascal-Emmanuel Gobry
Jul 27th Twitter thread

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