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The Blank Swan: The End of Probability

ISBN: 978-0-470-72522-1
496 pages
May 2010
The Blank Swan: The End of Probability (0470725222) cover image
October 19th 1987 was a day of huge change for the global finance industry. On this day the stock market crashed, the Nobel Prize winning Black-Scholes formula failed and volatility smiles were born, and on this day Elie Ayache began his career, on the trading floor of the French Futures and Options Exchange.

Experts everywhere sought to find a model for this event, and ways to simulate it in order to avoid a recurrence in the future, but the one thing that struck Elie that day was the belief that what actually happened on 19th October 1987 is simply non reproducible outside 19th October 1987 – you cannot reduce it to a chain of causes and effects, or even to a random generator, that can then be reproduced or represented in a theoretical framework.

The Blank Swan is Elie's highly original treatise on the financial markets – presenting a totally revolutionary rethinking of derivative pricing and technology. It is not a diatribe against Nassim Taleb’s The Black Swan, but criticises the whole background or framework of predictable and unpredictable events – white and black swans alike - , i.e. the very category of prediction.

In this revolutionary book, Elie redefines the components of the technology needed to price and trade derivatives. Most importantly, and drawing on a long tradition of philosophy of the event from Henri Bergson to Gilles Deleuze, to Alain Badiou, and on a recent brand of philosophy of contingency, embodied by the speculative materialism of Quentin Meillassoux, Elie redefines the market itself against the common perceptions of orthodox financial theory, general equilibrium theory and the sociology of finance.

This book will change the way that we think about derivatives and approach the market. If anything derivatives should be renamed contingent claims, where contingency is now absolute and no longer derivative, and the market is just its medium. The book also establishes the missing link between quantitative modelling (no longer dependent on probability theory but on a novel brand of mathematics which Elie calls the mathematics of price) and the reality of the market.

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Introduction.

PART I WRITING AND EVENT.

1 Writer of The BLANK Swan.

1.1 Prediction versus Prescription.

1.2 Generalizing Prediction.

1.3 The Derivatives Market.

2 The Writing of Derivatives.

2.1 First Steps on the Surface.

2.2 Introducing Contingency.

2.3 The Pricing Surface.

3 The Event of the Market.

3.1 From States of the World to Market Prices.

3.2 The Black–Scholes–Merton Paradigm.

3.3 The Critique of Derivative Pricing Theory.

3.4 The Necessity of Meta-Contextual Ascent.

4 Writing and the Market.

4.1 Pierre Menard.

4.2 Reading and Writing.

4.3 Approaching the Market.

PART II ABSOLUTE CONTINGENCY AND THE RETURN OF SPECULATION.

5 The Necessity of Contingency.

5.1 Against Speculation.

5.2 Speculative Materialism.

6 Passage to the Future.

6.1 From Possibility to Inexistence.

6.2 The Passage.

6.3 The Future 156

7 Necessity of the Future.

7.1 A Model World.

7.2 The Implied Absolute.

8 Necessity of Writing.

8.1 Radical Speculation.

8.2 The Pricing Alternative.

8.3 From the Market to Work.

PART III FLIGHT TO SYDNEY, OR THE GENESIS OF THE BOOK.

9 The Mathematics of Price.

9.1 The Absolute without Thought.

9.2 The Absolute within Thought.

10 Barton Fink.

10.1 The Pledge.

10.2 The Turn.

11 The Narrative Adventure.

11.1 The Line of Flight.

11.2 The POINT of the World.

12 Out of the Box.

12.1 The Purple Gastropod.

12.2 The Point of Return, the Point of Inversion.

2.3 How to be a Writer.

13 The Prestige.

13.1 Finding the Market, Binding the Book.

13.2 Absolute Deterritorialization.

14 The Geographical Process.

14.1 The Field of Ruins.

14.2 Landing on the Market.

PART IV CONVERSION OF CREDIT INTO EQUITY, OR THE GENESIS OF THE MARKET.

15 History of the Market.

15.1 The Conversion.

15.2 Possibility versus Contingency.

15.3 The Market.

16 From Debt to Equity.

16.1 Deduction of the Contingent Claim.

16.2 Deduction of the Exchange.

16.3 Deduction of Price.

17 The Market and the Philosophy of Difference.

17.1 The Pit of Price.

17.2 The Market and Time.

17.3 The Market and Difference.

18 Future of the Market.

18.1 The Category of Price.

18.2 The Step Beyond.

18.3 Place and Contingency.

18.4 Conclusion.

19 Appendix 1 The Logic and Mathematics of Regime Switching.

A1.1 Description of the Regime-Switching Model.

A1.2 General Backward Equations.

A1.3 Credit Default Swaps.

A1.4 Calibration.

A1.5 Recalibration.

20 Appendix 2 From 'Being and Time' to 'Being and Place' with Jeff Malpas.

Bibliography.

Index.

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Elie Ayache was born in Lebanon in 1966. Trained as an engineer at l’École Polytechnique of Paris, he pursued a career of option market-maker on the floor of MATIF (1987-1990) and LiFFE (1990-1995). He then turned to the philosophy of probability (DEA at la Sorbonne) and to derivative pricing, and co-founded of ITO 33, a financial software company, in 1999. Today, ITO 33 is the leading specialist in the pricing of convertible bonds, in the equity-to-credit problem, and more generally, in the calibration and recalibration of volatility surfaces. Elie has published many articles in the philosophy of contingent claims, as well as a book, dedicated to the philosophy of writing.
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