Sunday 24 February 2013

Credit spread is probability through a sausage machine. Volatility is probability through a juicer


Just as statistics is really an elaborate form of a particular kind of probability activity over sufficiently large numbers, then so too am I beginning to see the volatility of equity derivatives and the credit spread of the fixed income world as two other distinct kinds of mathematical context within which you can find probability theory applied.  And of course, probability is useful to us insofar as it can place a number on something ultimately unknowable.  Albeit a known unknown ('risk' or measurable uncertainty, in the Knightian sense).  My main point here is that credit spread and volatility, the two great inputs into fixed income and volatility modelling, are brothers.

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