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Principles of Financial Economics
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Financial economics plays a far more prominent role in the training of economists than it did even a few years ago.
This change is generally attributed to the parallel transformation in capital markets that has occurred in recent years. It is true that trillions of dollars of assets are traded daily in financial markets—for derivative securities like options and futures, for example—that hardly existed a decade ago. However, it is less obvious how important these changes are. Insofar as derivative securities can be valued by arbitrage, such securities only duplicate primary securities. For example, to the extent that the assumptions underlying the Black-Scholes model of option pricing (or any of its more recent extensions) are accurate, the entire options market is redundant, since by assumption the payoff of an option can be duplicated using stocks and bonds. The same argument applies to other derivative securities markets. Thus it is arguable that the variables that matter most— consumption allocations—are not greatly affected by the change in capital markets. Along these lines one would no more infer the importance of financial markets from their volume of trade than one would make a similar argument for supermarket clerks or bank tellers based on the fact that they handle large quantities of cash.
Stephen F. LeRoy and Jan Werner - Personal Name
1st Edtion
NONE
Principles of Financial Economics
Economics
English
2000
1-290
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