Roman Frydman and Michael D. Goldberg
- Published in print:
- 2013
- Published Online:
- October 2017
- ISBN:
- 9780691155234
- eISBN:
- 9781400846450
- Item type:
- chapter
- Publisher:
- Princeton University Press
- DOI:
- 10.23943/princeton/9780691155234.003.0005
- Subject:
- Economics and Finance, Macro- and Monetary Economics
This chapter examines the imperfect knowledge imperative in modern macroeconomics and finance theory. It argues that the Rational Expectations Hypothesis (REH) has nothing to do with how even ...
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This chapter examines the imperfect knowledge imperative in modern macroeconomics and finance theory. It argues that the Rational Expectations Hypothesis (REH) has nothing to do with how even minimally reasonable profit-seeking individuals forecast the future in real-world markets. It attributes REH's insurmountable epistemological difficulties and widespread empirical problems to a single, overarching premise that underpins contemporary macroeconomics and finance theory: nonroutine change is unimportant for understanding outcomes. It also suggests that contemporary behavioral finance models rest on the same core premise as their REH-based counterparts. Finally, it introduces an alternative approach to modeling individual behavior and aggregate outcomes: Imperfect Knowledge Economics, which opens macroeconomics and finance models to nonroutine change and the imperfect knowledge that it engenders.Less
This chapter examines the imperfect knowledge imperative in modern macroeconomics and finance theory. It argues that the Rational Expectations Hypothesis (REH) has nothing to do with how even minimally reasonable profit-seeking individuals forecast the future in real-world markets. It attributes REH's insurmountable epistemological difficulties and widespread empirical problems to a single, overarching premise that underpins contemporary macroeconomics and finance theory: nonroutine change is unimportant for understanding outcomes. It also suggests that contemporary behavioral finance models rest on the same core premise as their REH-based counterparts. Finally, it introduces an alternative approach to modeling individual behavior and aggregate outcomes: Imperfect Knowledge Economics, which opens macroeconomics and finance models to nonroutine change and the imperfect knowledge that it engenders.
Benjamin J. Richardson
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780195333459
- eISBN:
- 9780199868827
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195333459.003.0003
- Subject:
- Law, Company and Commercial Law
This chapter assesses the impact of SRI—its market size, financial performance, and influence on financiers and the corporations they service. Overall, it finds that the SRI market remains a boutique ...
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This chapter assesses the impact of SRI—its market size, financial performance, and influence on financiers and the corporations they service. Overall, it finds that the SRI market remains a boutique sector, and it is too small to alter the cost of capital or otherwise exert significant influence over companies. Current market surveys using vague criteria have significantly exaggerated the size of the SRI sector. SRI faces many unresolved problems, including barriers to long-term investment, coordination of action among financial institutions, and agency problems within financial actors. The SRI retail market is also undermined by superficial, fungible standards that allow dubious practices to masquerade as responsible investments. The alternative of religious-based ethical investment offers insights into a more principled approach.Less
This chapter assesses the impact of SRI—its market size, financial performance, and influence on financiers and the corporations they service. Overall, it finds that the SRI market remains a boutique sector, and it is too small to alter the cost of capital or otherwise exert significant influence over companies. Current market surveys using vague criteria have significantly exaggerated the size of the SRI sector. SRI faces many unresolved problems, including barriers to long-term investment, coordination of action among financial institutions, and agency problems within financial actors. The SRI retail market is also undermined by superficial, fungible standards that allow dubious practices to masquerade as responsible investments. The alternative of religious-based ethical investment offers insights into a more principled approach.
Mark Fenton-O'Creevy, Nigel Nicholson, Emma Soane, and Paul Willman
- Published in print:
- 2004
- Published Online:
- October 2011
- ISBN:
- 9780199269488
- eISBN:
- 9780191699405
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199269488.003.0004
- Subject:
- Business and Management, Finance, Accounting, and Banking, Organization Studies
Professional traders in financial markets are generally aware of the finance theory that uses powerful analytical tools to model the operations of financial markets and the set of practitioner ...
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Professional traders in financial markets are generally aware of the finance theory that uses powerful analytical tools to model the operations of financial markets and the set of practitioner theories that describe trading strategies that may result in large profits. This chapter examines the relationship between the general theories of the market and the specific theories that traders use through explaining the following: the behaviours of individuals in the market and how these behaviours have effects on the aggregate, the properties of these individual theories, the notions of intuition, reflexivity, and the emergence of contrarian beliefs, noise trading, and the relationship between formal theories and the theories that are actually applied in the market.Less
Professional traders in financial markets are generally aware of the finance theory that uses powerful analytical tools to model the operations of financial markets and the set of practitioner theories that describe trading strategies that may result in large profits. This chapter examines the relationship between the general theories of the market and the specific theories that traders use through explaining the following: the behaviours of individuals in the market and how these behaviours have effects on the aggregate, the properties of these individual theories, the notions of intuition, reflexivity, and the emergence of contrarian beliefs, noise trading, and the relationship between formal theories and the theories that are actually applied in the market.
EMILIOS AVGOULEAS
- Published in print:
- 2005
- Published Online:
- January 2010
- ISBN:
- 9780199244522
- eISBN:
- 9780191715105
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199244522.003.0004
- Subject:
- Law, Competition Law
This chapter deals with the economic analysis of market manipulation and explains its mechanics, that is, the most common methods, devices, and techniques used by manipulators to perpetrate their ...
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This chapter deals with the economic analysis of market manipulation and explains its mechanics, that is, the most common methods, devices, and techniques used by manipulators to perpetrate their abusive schemes, and the economic results of the various species of market manipulation. The most common definitions of market manipulation are considered to present a new, synthetic, and workable definition of market manipulation. This definition strives to reflect the realities of modern financial markets. It incorporates, in a conceptual mode, the findings of modern finance theory, in order to facilitate the gathering and interpretation of evidence that affirms the perpetration of market manipulation. The chapter also offers a systematic classification of the various forms of market manipulation, making constant reference to the definitions and illustrations of market manipulation contained in the Market Abuse Directive and in sections 397(1), (2) (misleading statements and practices), 397(3) (misleading conduct) and 118 (market abuse) of the UK’s Financial Services and Markets Act 2000.Less
This chapter deals with the economic analysis of market manipulation and explains its mechanics, that is, the most common methods, devices, and techniques used by manipulators to perpetrate their abusive schemes, and the economic results of the various species of market manipulation. The most common definitions of market manipulation are considered to present a new, synthetic, and workable definition of market manipulation. This definition strives to reflect the realities of modern financial markets. It incorporates, in a conceptual mode, the findings of modern finance theory, in order to facilitate the gathering and interpretation of evidence that affirms the perpetration of market manipulation. The chapter also offers a systematic classification of the various forms of market manipulation, making constant reference to the definitions and illustrations of market manipulation contained in the Market Abuse Directive and in sections 397(1), (2) (misleading statements and practices), 397(3) (misleading conduct) and 118 (market abuse) of the UK’s Financial Services and Markets Act 2000.
Kent Osband
- Published in print:
- 2014
- Published Online:
- November 2015
- ISBN:
- 9780231151733
- eISBN:
- 9780231525411
- Item type:
- book
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231151733.001.0001
- Subject:
- Economics and Finance, Financial Economics
This text argues that uncertainty is central rather than marginal to finance. Markets don't trade mainly on changes in risk. They trade on changes in beliefs about risk, and in the process, markets ...
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This text argues that uncertainty is central rather than marginal to finance. Markets don't trade mainly on changes in risk. They trade on changes in beliefs about risk, and in the process, markets unite, stretch, and occasionally defy beliefs. Recognizing this truth would make a world of difference in investing. Belittling uncertainty has created a rift between financial theory and practice and within finance theory itself, misguiding regulation and stoking huge financial imbalances. Sparking a revolution in the mindset of the investment professional, this text recasts the market as a learning machine rather than a knowledge machine. The market continually errs, corrects itself, and makes new errors. Respecting that process, without idolizing it, will promote wiser investment, trading, and regulation. With uncertainty embedded at its core, the book's rational approach points to a finance theory worthy of twenty-first-century investing.Less
This text argues that uncertainty is central rather than marginal to finance. Markets don't trade mainly on changes in risk. They trade on changes in beliefs about risk, and in the process, markets unite, stretch, and occasionally defy beliefs. Recognizing this truth would make a world of difference in investing. Belittling uncertainty has created a rift between financial theory and practice and within finance theory itself, misguiding regulation and stoking huge financial imbalances. Sparking a revolution in the mindset of the investment professional, this text recasts the market as a learning machine rather than a knowledge machine. The market continually errs, corrects itself, and makes new errors. Respecting that process, without idolizing it, will promote wiser investment, trading, and regulation. With uncertainty embedded at its core, the book's rational approach points to a finance theory worthy of twenty-first-century investing.
Robert Hagstrom
- Published in print:
- 2013
- Published Online:
- November 2015
- ISBN:
- 9780231160100
- eISBN:
- 9780231531016
- Item type:
- book
- Publisher:
- Columbia University Press
- DOI:
- 10.7312/columbia/9780231160100.001.0001
- Subject:
- Economics and Finance, Financial Economics
This updated second edition explores basic and fundamental investing concepts in a range of fields outside of economics, including physics, biology, sociology, psychology, philosophy, and literature. ...
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This updated second edition explores basic and fundamental investing concepts in a range of fields outside of economics, including physics, biology, sociology, psychology, philosophy, and literature. It discusses how the theory of evolution disrupts the notion of the efficient market and how reading strategies for literature can be gainfully applied to investing research. Building on Charlie Munger's famous “latticework of mental models” concept, the book argues that it is impossible to make good investment decisions based solely on a strong knowledge of finance theory alone. The concepts are reinforced with additional data and a new chapter on mathematics, and updated text throughout to reflect the developments of the past decade, particularly the seismic economic upheaval of 2008. Additionally, a hundred new titles have been added to the book's reading list.Less
This updated second edition explores basic and fundamental investing concepts in a range of fields outside of economics, including physics, biology, sociology, psychology, philosophy, and literature. It discusses how the theory of evolution disrupts the notion of the efficient market and how reading strategies for literature can be gainfully applied to investing research. Building on Charlie Munger's famous “latticework of mental models” concept, the book argues that it is impossible to make good investment decisions based solely on a strong knowledge of finance theory alone. The concepts are reinforced with additional data and a new chapter on mathematics, and updated text throughout to reflect the developments of the past decade, particularly the seismic economic upheaval of 2008. Additionally, a hundred new titles have been added to the book's reading list.
Anwar Shaikh
- Published in print:
- 2016
- Published Online:
- March 2016
- ISBN:
- 9780199390632
- eISBN:
- 9780199390663
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199390632.003.0010
- Subject:
- Economics and Finance, Macro- and Monetary Economics
This chapter extends the classical approach to the theory of finance. The competitive interest rate is the price of finance determined by a normal profit rate on banking capital. This explains the ...
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This chapter extends the classical approach to the theory of finance. The competitive interest rate is the price of finance determined by a normal profit rate on banking capital. This explains the correlation between the interest rate and the price level (Gibson’s Paradox) as well the persistent excess of the equity rate of return over the bond return (the Equity Premium Puzzle). As theoretically expected, the equity rate is shown to be equalized with the corporate incremental rate of profit. The corresponding theory of the level of equity prices is compared to various standard hypotheses such as the dividend-discount and FED models, and also to Shiller’s ‘excess volatility’ hypothesis which is the foundation of his claim that equity markets are irrationally exuberant. Instead, the actual equity price cycles turbulently around its competitive long-run equity level consistent with the classical theory and with Soros’s notion of reflexivity.Less
This chapter extends the classical approach to the theory of finance. The competitive interest rate is the price of finance determined by a normal profit rate on banking capital. This explains the correlation between the interest rate and the price level (Gibson’s Paradox) as well the persistent excess of the equity rate of return over the bond return (the Equity Premium Puzzle). As theoretically expected, the equity rate is shown to be equalized with the corporate incremental rate of profit. The corresponding theory of the level of equity prices is compared to various standard hypotheses such as the dividend-discount and FED models, and also to Shiller’s ‘excess volatility’ hypothesis which is the foundation of his claim that equity markets are irrationally exuberant. Instead, the actual equity price cycles turbulently around its competitive long-run equity level consistent with the classical theory and with Soros’s notion of reflexivity.
Eilis Ferran and Look Chan Ho
- Published in print:
- 2014
- Published Online:
- April 2014
- ISBN:
- 9780199671342
- eISBN:
- 9780191788895
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199671342.001.0001
- Subject:
- Law, Company and Commercial Law, Public International Law
Corporate finance theory seeks to understand how incorporated firms address the financial constraints that affect their investment decisions. This is achieved by using varied financial instruments ...
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Corporate finance theory seeks to understand how incorporated firms address the financial constraints that affect their investment decisions. This is achieved by using varied financial instruments that give holders different claims on the firm’s assets. Recent scholarship in this area explores precisely how legal mechanisms affect corporate finance and the development of financial markets. The legal environment is crucially important in explaining the choices that companies make about their capital structure. This book combines company law, capital market regulation, and commercial law to give readers a detailed understanding of the legal and regulatory issues relating to corporate financial transactions. Informed by insights from the theoretical and empirical work of financial economists, the book examines, from a legal perspective, key elements of corporate financing structures and capital markets in the UK.Less
Corporate finance theory seeks to understand how incorporated firms address the financial constraints that affect their investment decisions. This is achieved by using varied financial instruments that give holders different claims on the firm’s assets. Recent scholarship in this area explores precisely how legal mechanisms affect corporate finance and the development of financial markets. The legal environment is crucially important in explaining the choices that companies make about their capital structure. This book combines company law, capital market regulation, and commercial law to give readers a detailed understanding of the legal and regulatory issues relating to corporate financial transactions. Informed by insights from the theoretical and empirical work of financial economists, the book examines, from a legal perspective, key elements of corporate financing structures and capital markets in the UK.
Lawrence E. Mitchell
- Published in print:
- 2001
- Published Online:
- October 2013
- ISBN:
- 9780300090239
- eISBN:
- 9780300137767
- Item type:
- chapter
- Publisher:
- Yale University Press
- DOI:
- 10.12987/yale/9780300090239.003.0007
- Subject:
- Economics and Finance, Development, Growth, and Environmental
This chapter analyzes the relationship between corporate irresponsibility and traditional stockholders, and discusses a study which reports that there are approximately 50,000 people engaged in day ...
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This chapter analyzes the relationship between corporate irresponsibility and traditional stockholders, and discusses a study which reports that there are approximately 50,000 people engaged in day trading every single day. These investors have a profound effect on stock prices and market volatility, trade solely on rumor and volume, and care nothing for, and know nothing about, the corporations in which they invest. The chapter discusses the idea that modern finance theory supports the thinking of day traders, at least to some degree. The theory holds that corporate stock is nothing other than a measure of its risk in relation to that of other stock, and that the way to handle this risk is to develop a diversified portfolio of securities. The chapter also analyzes the role of the equity markets in detail.Less
This chapter analyzes the relationship between corporate irresponsibility and traditional stockholders, and discusses a study which reports that there are approximately 50,000 people engaged in day trading every single day. These investors have a profound effect on stock prices and market volatility, trade solely on rumor and volume, and care nothing for, and know nothing about, the corporations in which they invest. The chapter discusses the idea that modern finance theory supports the thinking of day traders, at least to some degree. The theory holds that corporate stock is nothing other than a measure of its risk in relation to that of other stock, and that the way to handle this risk is to develop a diversified portfolio of securities. The chapter also analyzes the role of the equity markets in detail.
Pippa Norris and Andrea Abel van Es
- Published in print:
- 2016
- Published Online:
- June 2016
- ISBN:
- 9780190603601
- eISBN:
- 9780190603632
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780190603601.003.0001
- Subject:
- Political Science, Comparative Politics, International Relations and Politics
During the last two decades, the issue of the most effective regulation of political finance, and the prevention of corrupt practices in the public sector, has risen to the top of the governance ...
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During the last two decades, the issue of the most effective regulation of political finance, and the prevention of corrupt practices in the public sector, has risen to the top of the governance agenda for the international community and for many domestic reformers. To address this challenge, this book focuses upon three questions: (1) What types of public policies are commonly employed to regulate the role of money in politics? (2) What triggers major political finance reforms? (3) “What works,” what fails, and why, when countries implement reforms? Section 1.1 of this chapter describes the evolving research agenda on money in politics, highlighting important advances during recent decades. Section 1.2 establishes the conceptual typology, which identifies four common public policies used to regulate political finance in states worldwide Section 1.3 outlines how the book explores these issues. Section 1.4 provides a roadmap of the rest of the book.Less
During the last two decades, the issue of the most effective regulation of political finance, and the prevention of corrupt practices in the public sector, has risen to the top of the governance agenda for the international community and for many domestic reformers. To address this challenge, this book focuses upon three questions: (1) What types of public policies are commonly employed to regulate the role of money in politics? (2) What triggers major political finance reforms? (3) “What works,” what fails, and why, when countries implement reforms? Section 1.1 of this chapter describes the evolving research agenda on money in politics, highlighting important advances during recent decades. Section 1.2 establishes the conceptual typology, which identifies four common public policies used to regulate political finance in states worldwide Section 1.3 outlines how the book explores these issues. Section 1.4 provides a roadmap of the rest of the book.
Donald Mackenzie
- Published in print:
- 2006
- Published Online:
- August 2013
- ISBN:
- 9780262134606
- eISBN:
- 9780262278805
- Item type:
- book
- Publisher:
- The MIT Press
- DOI:
- 10.7551/mitpress/9780262134606.001.0001
- Subject:
- Society and Culture, Technology and Society
This book argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical ...
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This book argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical models of markets, were not simply external analyses but intrinsic parts of economic processes. Paraphrasing Milton Friedman, the author states that economic models are an engine of inquiry rather than a camera to reproduce empirical facts. More than that, the emergence of an authoritative theory of financial markets altered those markets fundamentally. For example, in 1970, there was almost no trading in financial derivatives such as “futures.” By June of 2004, derivative contracts totaling USD 273 trillion were outstanding worldwide. The author suggests that this growth could never have happened without the development of theories which gave derivatives legitimacy and explained their complexities. The book examines the role played by finance theory in the stock market crash of 1987 and the market turmoil that engulfed the hedge fund Long-Term Capital Management in 1998. It also looks at finance theory that is somewhat beyond the mainstream—chaos theorist Benoit Mandelbrot’s model of “wild” randomness.Less
This book argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical models of markets, were not simply external analyses but intrinsic parts of economic processes. Paraphrasing Milton Friedman, the author states that economic models are an engine of inquiry rather than a camera to reproduce empirical facts. More than that, the emergence of an authoritative theory of financial markets altered those markets fundamentally. For example, in 1970, there was almost no trading in financial derivatives such as “futures.” By June of 2004, derivative contracts totaling USD 273 trillion were outstanding worldwide. The author suggests that this growth could never have happened without the development of theories which gave derivatives legitimacy and explained their complexities. The book examines the role played by finance theory in the stock market crash of 1987 and the market turmoil that engulfed the hedge fund Long-Term Capital Management in 1998. It also looks at finance theory that is somewhat beyond the mainstream—chaos theorist Benoit Mandelbrot’s model of “wild” randomness.
