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The role of theory in finance research

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  • Itay Goldstein

Abstract

Over the years, a big part of research in finance has been directed toward the development of new theories based on mathematical formalism. I review classic examples demonstrating the success of this approach, how it enabled transformation in analysis, and had spillovers to measurement, policy, and practice. I discuss the limitations of mathematical models and how these models should be evaluated. Finally, I argue that, despite the greater prevalence of data and empirical methods these days, there are still many opportunities for theory research. I provide some examples. Enabling these opportunities is critical for the continued progress of the field.

Suggested Citation

  • Itay Goldstein, 2025. "The role of theory in finance research," The Financial Review, Eastern Finance Association, vol. 60(3), pages 657-666, August.
    • Handle: RePEc:bla:finrev:v:60:y:2025:i:3:p:657-666
    DOI: 10.1111/fire.12443
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    References listed on IDEAS

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    7. Paul Pfleiderer, 2020. "Chameleons: The Misuse of Theoretical Models in Finance and Economics," Economica, London School of Economics and Political Science, vol. 87(345), pages 81-107, January.
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