Benchmark, pancakes, and interest rates

Eckhard Platen delivered the first half of his mini-course on the Benchmark Approach today, as part of the graduate course on Foundations of Mathematical Finance. This is a fascinating topic that he and co-authors developed in the past decade or so, leading to an alternative paradigm for mathematical finance, from asset pricing to portfolio management to hedging of long-dated securities. To me, one of the most interesting results in the approach is an absolute pricing mechanism, that is, derived from the real economy as a whole, as opposed to relative pricing, in which securities in some corner of the market are priced in relation to each other. In other words, this is a healthy response to what Larry Summers famously mocked as "ketchup economics" in a piece reproduced in this post by Matthew Yglesias today.

But since we are in Canada, it is much better to talk about mapple syrup than ketchup, and the Fields Institute treated us to their delicious annual pancake lunch.

In the afternoon, Tomas Bjork delivered the first third of his mini-course on interest rate theory, which consisted of standard graduate level material, but was of course delightful to graduate students and faculty members alike, since most of us first learn financial mathematics by reading his book anyway.