T Nation

Cambridge University Econ Prof: Doom


#1

The stock market will collapse totally.

"It's no surprise, then, that when Andrew recently focused on the options markets, wondering if their phenomenal growth -- and the immense popularity among portfolio managers of using options to "insure" equity positions against market risk -- might not have a dark side, he enlisted the best and most disinterested help he could find: Mathematics don Stephen Wright, a member of the economics and politics faculty at Cambridge University. The report the two released last month, entitled "Stock Options: An Example of Catastrophe Myopia," not only argues cogently that most market participants don't recognize a number of risks inherent in their option activities, but also achieves the nearly impossible in quantifying, even roughly, the sorts of risks therefore being run."

"What's more likely is that the phenomenal growth in the size of the options markets will accentuate the magnitude of any crash set off by other forces. It's also more likely to increase the size of the market's price discontinuities -- meaning the extent to which large price movements take place without permitting transactions at intermediate prices."

http://www.greenspun.com/bboard/q-and-a-fetch-msg.tcl?msg_id=001bdG