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The epistemology of modern finance

Author

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  • Xavier De Scheemaekere

    (Université libre de Bruxelles)

Abstract

Modern finance is a social science where the complexity of mathematical models compares to that of physics. The aim of this paper is to provide a conceptual framework for the interpretation of mathematical models in finance, in order to determine the epistemological standards according to which financial theory must be assessed. The analysis enlightens the contrast between highly objective results and the radical uncertainty that governs the markets. The main contribution of the paper is to show that the reasons why finance models are relative and non-causal are deeply rooted in the nature of finance theory itself. An important consequence is that arbitrage-free model prices are reference prices and indicators of the economical features underlying mathematical models. As such, they can be used to structure and support final pricing and hedging decisions, but not to predict future market prices.

Suggested Citation

  • Xavier De Scheemaekere, 2009. "The epistemology of modern finance," The Journal of Philosophical Economics, Bucharest Academy of Economic Studies, The Journal of Philosophical Economics, vol. 2(2), pages 99-120, May.
    • Handle: RePEc:bus:jphile:v:2:y:2009:i:2:p:99-120
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    References listed on IDEAS

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    Cited by:

    1. Daniel Polakow & Tim Gebbie & Emlyn Flint, 2023. "Epistemic Limits of Empirical Finance: Causal Reductionism and Self-Reference," Papers 2311.16570, arXiv.org, revised Sep 2024.
    2. Hélène Rainelli & Hélène Rainelli-Weiss, 2019. "Recherche en finance : quand la performativité invite à la réflexivité," Post-Print halshs-02025011, HAL.
    3. Andrikopoulos, Andreas, 2015. "Truth and financial economics: A review and assessment," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 186-195.
    4. 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.
    5. Leonel Arango-Vasquez, 2025. "From rational to behavioural: an epistemological bridge between Markowitz, Fama, and Shiller," The Journal of Philosophical Economics, Bucharest Academy of Economic Studies, The Journal of Philosophical Economics, vol. 18(1), pages 160-202, Annual.
    6. Leonel Arango-Vasquez, 2025. "From rational to behavioral: An epistemological bridge between Markowitz, Fama, and Shiller," Post-Print hal-05003891, HAL.
    7. Lagoarde-Segot, Thomas, 2015. "Diversifying finance research: From financialization to sustainability," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 1-6.
    8. Xavier De Scheemaekere & Kim Oosterlinck & Ariane Szafarz, 2014. "Issues in Identifying Economic Crises: Insights from History," Working Papers CEB 14-014, ULB -- Universite Libre de Bruxelles.

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    JEL classification:

    • G00 - Financial Economics - - General - - - General

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