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Modeling Rational Turbulence

Kent Osband, RiskTick LLC

Fair pricing in financial markets requires agents to treat prices like probability forecasts and to update their beliefs using Bayes’ rule. When risks are stable, rational learning is relatively smooth and prices behave as standard theory says they should. When risks change abruptly enough, rational learning creates market turbulence, analogous to the turbulence in fast-moving fluids. This session shows how MATLAB models can help explore rational turbulence.

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Recorded: 23 May 2013