Derivatives Models on Models

David Bates David Bates on Crash and Jumps

David Bates is a Professor of Finance at the University of Iowa. Early on he specialized in jumps and stochastic volatility. David Bates was one of the first to demonstrate practically how implied distributions from liquid options could be used to extract useful market expectations.¹ He has shown us that options are not only of interest to traders and hedgers but also to anyone who wants to obtain information about what some of the smartest people in the market (option traders) know and expect.

David Bates does not only develop fancy models he is also an empiricist, spending a great deal of time testing if the models work reasonably well. As an option trader I am particularly interested in tail events, and especially what I call models of models risk. When most people buy an exchange traded put option and the underlying stock falls in value below the strike price they are certain that they will get paid. Most people forget that underlying their derivatives model they have a model of default risk in the clearinghouse. David Bates has looked empirically into such types of risk, something we soon will learn more about.

Haug : When did you first become interested in quantitative finance?

Bates : Largely by accident. As a grad student at Princeton, my primary interests were in international finance. I was trying to come up with an explanation for uncovered interest parity rejections – the fact that putting money in relatively high-interest ...