I don't see what's wrong with people trying to make money. Some of us also just enjoy mathematics for their own sake. That said, one doesn't have to believe in the models to take advantage of them... and I don't think any of us here would bet the world economy on them. No tricks of the trade then, guys? If you don't use/believe in models, what do you use? How does diapers at Walmart translate to an opinion on vol, outside of an opinion on direction?
Each individual contributes nothing but as a whole they provide added depth and liquidity. This causes higher stock prices and lower cost of capital for business who do produce real products and services for a real economy. The crash of 2009 was about this. The market depth weakend and as a result cost of capital went through the roof and many businesses went under. And greed drives the real economy as much as the financial one. It creates innovation. Look at countries where capitalistic greed is substituted for government or kelptocratic greed. Very little innovation and quality of life improvements for the population.
(staying away from ideas of greed/capitalism etc and sticking to models.....) They had 2 separate but certainly related issues. It was the overleveraging that blew them up. This was the result of them believing in the models infallibility...... They clearly thought it represented reality otherwise why would they have even started trading it in the first place. If they had not leveraged as much they probably would not have blown up even if the models turned out to guess-ti-models. The best (ha!) reflection I have heard about LTCM was from a UBS guy. His take - "their models were right, they just ran out of money. If that did not occur then they would have been ok."...so I asked him - "So why didnt UBS and the other banks lend them more money?" - no reply. ////////////////////// for the OP - Personally I view models as guide rails. They help either keep you on the right path, or alert you to opportunities when others are relying too much on them. They give a 'fair value' not an 'accurate value'...and maybe that great quant modeller Buffett has some great quotes applicable to models. http://www.brainyquote.com/quotes/authors/w/warren_buffett.html I have great respect for the quants who understand the limitations of their models and the best way to use them, and little respect for those who think their model is the market. Hence in answer to a lot of your questions (*and I am not a quant - so take this FWIW, but as this is more about options) is that the predictive value comes from understanding the limitations of a model and when the market requires liquidity or has too much of it.
Yes, there are models, although I wouldn't get too excited about GARCH... In my experience, trading vol is mostly a matter of exhaustive and relentless scenario analysis, rather than models.
mj- Can you tell us what your experience level is? Hard to judge from your questions. Are you interested in OTC markets or in the plain vanilla equity options space?
i just want to clarify what I mean by "every options trader basically thinks of the world as a GARCH model", which i doubt is what i actually wrote. This means that volatility traders basically view volatility as locally persistent but globally mean-reverting. this is the central insight behind garch. but garch then dives headfirst into a rabbit hole of mathematics and things rapidly become fairly pointless.
if this is your post 1 how could you have written a previous:]i just want to clarify what I mean by "every options trader basically thinks of the world as a GARCH model", which i doubt is what i actually wrote.