The epistemology of modern finance
AbstractThis paper investigates modern finance’s epistemological status with a special emphasis on its most quantitative part: Black-Scholes option pricing model and its extensions. It zeroes on the analysis of mathematical methods in financial economics and their connection to risk and uncertainty. Risk-neutral valuation, a direct consequence of Black-Scholes model, restricts the range of individual and subjective uncertainty by putting a price on replicable risk, thereby conferring to modern finance a unique kind of objectivity in pricing assets, as opposed to any speculative assessment. Yet, in another sense, this objectivity is only relative for it has no direct connection to the real world, nor any causal or predictive power, for modern finance ultimately deals with uncertainty itself. The paper sheds light on the articulation of these contrasting aspects.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 06-017.RS.
Length: 29 p.
Date of creation: Sep 2006
Date of revision:
Publication status: Published by: Université Libre de Bruxelles, Solvay Business School, Centre Emile Bernheim (CEB)
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Asset pricing; Black-Scholes option pricing model; Modern finance; Risk; Uncertainty.;
Find related papers by JEL classification:
- B16 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Quantitative and Mathematical
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
- NEP-FIN-2006-09-30 (Finance)
- NEP-FMK-2006-09-30 (Financial Markets)
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- Xavier De Scheemaekere & Kim Oosterlinck & Ariane Szafarz, 2012. "Addressing Economic Crises: The Reference-Class Problem," Working Papers CEB 12-024, ULB -- Universite Libre de Bruxelles.
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