ep46 - The fall of LTCM: Bachelier, Merton, and Black–Scholes ... when stochastic control met Wall Street
About this episode
This episode explores the intersection of stochastic control and Wall Street through the lens of financial theories and the collapse of LTCM.
Outline 00:00 - Intro 02:25 - Bachelier and the Théorie de la Spéculation 03:05 - Stochastic processes, Brownian motion, and the heat equation 09:45 - Poincaré's verdict, obscurity, and rediscovery 13:50 - Robert C. Merton: from hot rods to MIT 19:25 - Dynamic programming and Itô calculus 24:35 - Merton's portfolio problem as stochastic optimal control 31:10 - Options, dynamic hedging, and the Black–Scholes–Merton equation 39:50 - LTCM: the dream team 46:30 - August 1998: the crash 49:00 - Fa...
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