Gdp

[Petrescu]

Id like to ask a question. But before I do please open up a 100 year chart of the Dow. What's the first thing that you notice? The upward bias is huge right. So how can the BS formula assume gain is only as likely as loss. BS assumes the current price is the most likely future price. Clearly that is not the case. Shouldn't there be a GDP input to give it an upward bias? Sure for a few months it is insignificant but shouldn't the formula be scalable? Oh and let's forget about the positive skew due to continuous compounding that is a different matter. What am I missing?

For proper disclosure I'm reading a book on options by mandlebrot so I'm already skeptical of B-S.

 

[Martinghoul]

It's not a big deal. The mkt prices it, with B-S as a foundation. Moreover, there are all sorts of next-generation models that take drift into account. Finally, the fact that indices exhibit this natural drift doesn't invalidate B-S, given that it's applied to many other asset classes.

 

[toomuch]

When taking in inflation, the rise isn't as spectacular as it looks