Credit Default Swap (CDS) question and answer

[David Farber <dave () farber net>]

Begin forwarded message:

From: "David P. Reed" <dpreed () reed com>
Date: October 20, 2008 3:45:25 PM EDT
To: Jon Urdan <jon () lambeaucap com>
Cc: "'Savage, Christopher'" <ChrisSavage () dwt com>, dave () farber net
Subject: Re: [IP] Credit Default Swap (CDS) question and answer

Isn't it true that you can't hedge against Black Swans, by definition?

There is no "black swan" here, I think.  I think the problem is that  
the modelers decided that their models were true, regardless of data.   
That is, they were mathematically true, but not empirically true.

There's a reason that experimental physicists continually re-test such  
things as the idea that the cosmological constant is zero or that  
inertial and gravitational mass are equivalent.   That reason is that  
even the "laws of physics" are contingent on what we *think* we know.

The "laws of finance" are far from physics in their quality of  
validation, and quants are largely *failed* physicists - ones who  
studied the texts but had little participation in the actual culture  
of physics.

(of course, the physics subculture of "string theorists" has many  
problems, too, since they have been shown to habitually avoid creating  
hypotheses that are falsifiable).



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