Instantaneous self-fulfilling of long-term prophecies on the probabilistic distribution of financial asset values |
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Authors: | P.-L. Lions J.-M. Lasry |
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Affiliation: | 1. CEREMADE, UMR C.N.R.S. 7534, Université Paris 9, Dauphine, Place du Maréchal de Lattre de Tassigny, 75775 Paris Cedex 16, France;2. R&D and Risk Advisory, Crédit Agricole Indosuez, 9, Quai du Président Paul Doumer, 92920 Paris La Défense Cedex, France |
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Abstract: | Our goal here is to present various examples of situations where a “large” investor (i.e. an investor whose “size” challenges the liquidity or the depth of the market) sees his long-term guesses on some important financial parameters instantaneously confirmed by the market dynamics as a consequence of his trading strategy, itself based upon his guesses. These examples are worked out in the context of a model (i.e. a quantitative framework) which attempts to provide a rigorous basis for the qualitative intuitions of many practitioners. Our results may be viewed as some kind of reverse Black–Scholes paradigm where modifications of option prices affect today's real volatility. |
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