Pasquale Cirillo (TU Delft)
The distortions of finance
May 5, 2020 – 12.30
Finance is a world of distortions. Many tools we use, many findings we know are actually the result of a distortion.
Take the well-known Black-Scholes model: the probability to be in the money at maturity under P and Q is a distortion. And the price of a European call? Another distortion.
Consider risk management, think about the expected shortfall, and—guess what?—a distortion.
And if you think that copulas are immune, you are wrong, plenty of distortions there.
Model risk is often represented in terms of distortions.
So, let’s talk about distortions, and in particular about the special class of Lorenz transforms.