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As I don't really understand your question except for the volatility smile: Here is a presentation about how the volatility smile flattens as computational precision increases: http://www.rinfinance.com/agenda/2013/talk/Chance+Hanson+etal.pdf the intuition there is that the smile may be the result of computational error. I would look at agent based ...


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I think there is a slight misconception into the purpose of an economic theory. The market is a complex entity to be modeled and yes, it is neither efficient nor arbitrage free but it is trading and there is a price process that corresponds to the market one. You could say that classical economic theory has failed, but I would argue the idea of a theory is ...


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I would argue that indeed none of the so-called stylized facts you mentioned can be explained by classical economic theory. That there was a gross delta between the predictions of classical economic theory and empirical data was foremost found out by Benoit Mandelbrot as far back as 1963 in his seminal paper: The Variation of Certain Speculative Prices In ...


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Classical economics cannot "explain" volatility smiles, but neither does it preclude their existence. Economics is far more abstract than financial "quant"modeling and answers very different questions. In the more abstract framework of economics, volatility skew, mean reverting volatility, bubbles, and crashes are all conceivable scenarios. ...


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Yes and no :-) Portfolio VaR = CV1 + CV2 + CV3 + CV4 is correct. To safeguard my answer, I looked this up from thinxlabs.com The individual component VaRs from the assets in the portfolio should add up tho the total portfolio VaR. The equation is as follows. But you need to calculate another VaR for each account, if you want to use CV on those. The ...


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If you call "classical" what is usually tagged as "neoclassical mainstream", then perhaps the answer is no. From the other hand behavioral finance is long time ago became widely accepted and taught, together with cascades stories a-la Hirshleifer. So in wider sense, economics has long ago explained observed deviations from standard theory.



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