Ergodic failure: The key vulnerability in derivatives modelling

Editorial Board Member,

Journal of Risk Management in Financial Institutions, 2009, vol. 2, issue 4, 336-339

Abstract: Ergodicity is a principal property intrinsic to the mathematical modelling of capital markets. It is a structural symmetry underpinning the way in which information is extrapolated from today's state of the world to new, stochastic, future states. The failure of ergodicity — manifested in the myriad of dysfunctionality in capital markets during the financial crisis — represents a primordial breakdown in the way financial engineering has mathematically parameterised its underlying markets. This paper assesses the consequent implications of such failure with respect to the pricing of derivatives.

Keywords: ergodic; volatility; derivatives; models; static-hedging (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2009:v:2:i:4:p:336-339

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