So I think that models is the single most abused term in all of finance/economics. To an outsider it seems like a fancy term but to someone else its a glorified word for an equation. I would like this thread to be used to questions that people have about models when used in context for S&T.
I will start, what does the term model mean when used in S&T? Who uses them, what are their limits, and finally why are models used?
In S&T you will see a lot of spreadsheets, but they are not all "models" per se. For example, you might download 25 years of stock performance from Bloomberg to see how a trading strategy might have paid off, but this would hardly be considerd a "model."
I would say a true model inputs a trader's own assumptions into an equation and paired with market data, generates an expected price which one would compare to the market price to devise a trading strategy. For example, inputting historical vols into an options model and comparing that to implied vols in exchange traded options.
I assume you're talking about things like Black-Scholes, etc. These are, in reality, models for market movements--you make assumptions like Geometric Brownian Motion, and operate in a certain unconstrained space that approximates (ie. models) the market. The result might be an equation, but the underlying is really a model (and you can modify the Black-Scholes model for different assumptions, (ie. VarGamma models). Then you have more sophisticated market or interest rate models, or stock models--I don't really see how you could qualify those as not models. Their sophistication tends to be significantly more complex than any DCF banking model (where parameter estimation is normally intuition, and a lot of comparison and replication.)
pretty much agree with gka.
models are different ways of describing the future evolution of whatever you're considering. depending on the model, different paramters will be important.
Does anyone still use Black-Scholes for pricing?
sure, every day.
S&T Modeling (Originally Posted: 02/25/2009)
Is there any place that I can learn about commodity modeling? I know Excel well but all the modeling sites I have found only focus on valuation and typical banking modeling.
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