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The epistemology of modern finance

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  • Xavier De Scheemaekere

Abstract

This 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.

Suggested Citation

  • Xavier De Scheemaekere, 2006. "The epistemology of modern finance," Working Papers CEB 06-017.RS, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:06-017
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    File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/14567/1/rou-0192.pdf
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    Cited by:

    1. 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.
    2. Lagoarde-Segot, Thomas, 2015. "Diversifying finance research: From financialization to sustainability," International Review of Financial Analysis, Elsevier, vol. 39(C), pages 1-6.
    3. 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.

    More about this item

    Keywords

    Asset pricing; Black-Scholes option pricing model; Modern finance; Risk; Uncertainty.;

    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

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