Black Scholes works on some pretty flimsy assumptions. I understand that predicting the future is no easy task, but does anyone have any recommended readings for models that use less assumptions?

Edit: In particular addressing the assumption of Brownian motion for prices.

Everyday I commute on my way to work and I see the most foreboding sight ever: Cranes. Huge massive cranes unloading new goods from across the seas right next to my adoptive home of San-Francisco. We’ve all heard about debt relations between China and the USA: How China both sales the U.S. its manufactured goods and then reinvests its capital in the U.S.

With Chinese personal savings rate near 50% and American savings rate being non-existent, it’s easy to see that the Chinese aren’t consuming the products made in their local market and are instead focusing on bolstering the economy of the USA. Peter Schiff says it best when he talks about a day when Chinese will just turn back the freighters hauling goods to the U.S. and refocus their capital on internal consumption.

John Ralston Saul has a great sound-byte when he says that The West doesn’t really want globalization. We want free trade with other western countries that have somewhat similar prices. Otherwise we wouldn’t yell “Predatory Pricing” whenever a country that has a tenth of the wage cost we do tries to sell something here. If we really wanted globalization we wouldn’t try to force China to change it’s monetary policy. Recently we’ve forced the Chinese to put tariffs on themselves under the threat that we’ll do that for them if we have to.

tl;dr: Which brings me to my question, Isn’t encouraging China to place export tariffs a terrible idea? The Chinese government can’t physically “turn back the boats” using policy initiatives, but an internal exports tax is exactly the way they’d incentivize refocusing Chinese capital on internal investment and consumption. If we were ever to see a non-gradual meltdown of Sino-American economic relationship, wouldn’t Chinese export tariffs inevitably play a role in that? It seems to me that encouraging the Chinese to have export tariffs is diametrically opposed to what the situation calls for.

I’ve always notice a trend where as soon as oil prices increase, I immediately feel it at the pump. But when oil prices fall, it seems to take much longer for the effects to be felt at the pump.

I guess you could argue the oil at the refineries are at the higher prices when it falls but that also means the oil at the refinery is at the lower prices when prices spike.

Hi,

I have a question regarding some of the mechanics of a closed market. In particular, the trade market.

How come, in the trade market, were the number of companies is somewhat fixed, but were the inflow of new investors increases over time, those companies (and the market itself) somehow maintain, or even increases it’s values? I mean, isn’t the offer of money in that market increasing, while the number of companies demanding this money continues the same?

Actually, although I’m not completely sure, I think I know the answer (please correct me if wrong): it’s because those companies are generating it’s values in theirs respectives business, trhu profit. Is that right? If so, we are getting where I want to my real questions.

If the only thing maintaining the market’s value is the continuous growth of it’s profit (or at least the promise of that) aren’t we in a certain path to market ruin because continuous growth is impossible?

In a more broad/economical question, is it possible to develop a market that doesn’t fund itself is this continuous growth but rather in a constant state?

Don’t get me wrong. I’m not trying to imply or turn this in a ideological discussion. Like I said in the title, I’m interested in the mechanics of a closed market. I’m a engineering student deviating in his subject of interest.

For your information, this question arose from a discussion with a friend about the economics of that game “Second Life”. We were trying to reach a conclusion if a market based in virtual objects would be sustainable in the long run. Any inputs in that question would also be appreciated.

I think that now I must thank for your patience and ask sorry for the “train of thought” type of post.

Thanks and sorry.