GerryB43

Taleb vs Merton, Cont.

The entire Capital Asset Pricing structure rests upon the assumption of continuity of causal factors. Introducing a new factor is the essence of a discontinuous event. Without a mechanism to account for changes in the factor set in a model (an error term?) any model becomes dangerous to use in constructing or managing portfolios of securities.

Even the SEC's study of the effects of mark to market accounting acknowledges the existence of anomalous effects from using the "mixed-attribute model" of valuation. Clearly, the existing models were not ready for this form of new information. We have a long way to go before a new structure for analysis can achieve widespread and confident use.