Holes in Some of Finance’s Critical Assumptions: A Dialogue with Massif Partners’ Kevin Harney (Part One)

In finance even basic assumptions — like which technique to use to calculate prices for such financial instruments as derivatives or how you calculate rates of return for assets — determine how you see the world. If the techniques have flaws, then your understanding and insight into things as fundamental as prices and return are also flawed.

Chief among the flaws are Brownian motion used as a proxy of random movement, its use in calculating compound annual growth rates, and the valuation sensitivity of derivative instruments to volatility.

Serendipitously, several weeks ago for the first time, I met Kevin Harney — a true quant — and we both discovered that we have mutual interest in the holes in some of finance’s critical assumptions. Read more.