Significance of financial model sensitivity

Money is the blood of the financial market, and transactions are the blood flow of the financial market. If a transaction requires a product, the richer the transaction volume of the product, the greater the traffic flow. Products in the financial market are virtual and real. With the development of financial derivatives, financial engineering also develops. In this process, products and technologies complement each other. Financial engineers design financial derivatives. Investment Banks (brokers) issue products based on no-arbitrage, and hedge funds make these transactions based on arbitrage. One is a market maker, which aims to earn commission in the transaction; the other is a trader who aims to get the price difference in the transaction.
The essence of financial engineering: the use of various mathematical theories and tools in financial markets. Mathematical models are built on the premise of certain assumptions based on actual problems. Any mathematical model has its own characteristics. The sensitivity of the mathematical model is the extent to which the model variable error affects the model result error. This degree can be correlated, linear, non-linear, or unknown. The quality of accuracy is an important indicator for evaluating the quality of a mathematical model (it is not to say that the accuracy is high, the accuracy is low, and everything has two sides ). Precision is sometimes crucial to the financial model. Sometimes the accuracy of the model determines whether the arbitrage space exists or not, and the difference between the arbitrage space. In general, high-precision models have high sensitivity and high sensitivity. In general, the adaptability is relatively small. For example, high-precision lathes in laboratories cannot be used in open-air plants. Sensitivity analysis is required for any mathematical model, such as under what circumstances can be used and under what circumstances cannot be used, higher analysis can evaluate the accuracy and error of the model under different circumstances. However, it is clear, for example, that in the analysis, these situations are what we assume, or what we can think. In some cases, you may not be able to analyze this situation unless you think of it. Some people may think of it, but we will think that the probability of this situation is very low. For the secondary debt crisis, at the beginning, everyone thought that the secondary bond is a good investment target. Perhaps its risk adjusted income is relatively high. Of course, any good thing brings a great risk, since the investment bank chooses secondary bonds, it has obtained good profits in the early stage, and later the risk must be borne by itself.
Everything has two sides. What matters is your choice and you are always prepared to bear the risks that may arise from your choice. Of course, it is best to perform sufficient sensitivity analysis before selection.