Scandinavian Working Papers in Economics

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2004/5: Negative volatility and the Survival of Western Financial Markets

Knut K. Aase ()
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Knut K. Aase: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: The paper discusses situations where certain parameters are given values that are outside their natural ranges. One case is obtained when plugging in a negative value for the volatility parameter in the Black and Scholes formula. This leads to seemingly "new" results. A different setting is considered related to the developments in time of biological populations. Here deterministic models lead to chaotically fluctuating population sizes, which came as a surprise to workers with population data. It is argued that the origins for the seemingly new and original results may be related.

Keywords: The Black and Scholes Model; negative volatility; population models; chaotic fluctuations; bifurcation

JEL-codes: G10

8 pages, March 17, 2004

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