The epistemology of modern finance

Xavier De Scheemaekere ()

No 06-017.RS, Working Papers CEB from ULB -- Universite Libre de Bruxelles

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.

Keywords: Asset pricing; Black-Scholes option pricing model; Modern finance; Risk; Uncertainty. (search for similar items in EconPapers)
JEL-codes: B16 G12 G13 (search for similar items in EconPapers)
Pages: 29 p.
Date: 2006-09
New Economics Papers: this item is included in nep-fin and nep-fmk
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Citations: View citations in EconPapers (5)

Published by: Université Libre de Bruxelles, Solvay Business School, Centre Emile Bernheim (CEB)

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