Skip to main content Accessibility help
×
Home
Hostname: page-component-65d66dc8c9-b9p8j Total loading time: 0.627 Render date: 2021-09-29T03:08:10.245Z Has data issue: true Feature Flags: { "shouldUseShareProductTool": true, "shouldUseHypothesis": true, "isUnsiloEnabled": true, "metricsAbstractViews": false, "figures": true, "newCiteModal": false, "newCitedByModal": true, "newEcommerce": true, "newUsageEvents": true }

A Primer in Financial Economics

Published online by Cambridge University Press:  10 June 2011

S.F. Whelan
Affiliation:
University College Dublin, Belfield, Dublin 4, Ireland. Tel: +353-1-716-7155; Fax: +353-1-716-1186; E-mail: Shane.Whelan@ucd.ie

Abstract

This paper is divided into three parts. Taken together, the three parts intend to provide the reader with an overview of the first 101 years of financial economics, with particular attention on those developments that are of special interest to actuaries. In Section 1, S.F. Whelan attempts to capture the flavour of the subject and, in particular, to give an overview or road map of this discipline, highlighting actuarial input. In Section 2, D.C. Bowie gives a concise and self-contained overview of the Modigliani and Miller insights (or MM Theorems, as they are often known). In Section 3, A.J. Hibbert considers the novel option pricing method proposed by Black, Merton, and Scholes. These two insights are highlights of this newscience, and, in both cases, contradict our intuition.

T.S. Elliot, the mathematically trained poet, described the darkness that intercedes between the idea and the action as the ‘shadow’. There is a shadow to be considered between these insights and their application. The demonstration of the results requires, of course, some idealised circumstances, and therefore the extent and degree of their applicability to the non- idealised problems encountered by actuaries requires some delicate considerations. An attempt is made to outline these further considerations.

Type
Sessional meetings: papers and abstracts of discussions
Copyright
Copyright © Institute and Faculty of Actuaries 2002

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bachelier, L. (1900a). Théorie de la spéculation. Annales Scientofiques de l'École Normale Supérieure, III17, 2186.CrossRefGoogle Scholar
Bachelier, L. (1900b). Theory of speculation. Translation by Boness, . In Cootner, P.H. (ed.) (1964), The random character of stock market prices. The MIT Press, 1778, and also in Haberman & Sibbett (1995).Google Scholar
Barriol, A. (1908). Théorie et pratique des opérations financières. O. Doin, Paris.Google Scholar
Bernstein, P. (1992). Capital ideas: the improbable origins of Wall Street. The Free Press, New York.Google Scholar
Black, F. (1980). The tax consequences of long-run pension policy. Financial Analysts Journal, 36, 2128.CrossRefGoogle Scholar
Black, F. (1988). On Robert C. Merton. MIT Management (Fall).Google Scholar
Black, F. & Scholes, M. (1973). The pricing of option contracts and corporate liabilities. Journal of Political Economy, 81, 637654.CrossRefGoogle Scholar
Bodie, Z. & Merton, R.C. (2000). Finance, Prentice Hall.Google Scholar
Bouman, S. & Jacobsen, B. (2002). The Halloween indicator: sell in May and go away: another puzzle. American Economic Review (to appear).Google Scholar
Breeden, D. (1979). An intertemporal asset pricing model with stochastic consumption and investment opportunities. Journal of Financial Economics, 7, 265296.CrossRefGoogle Scholar
Brown, S., Goetzmann, W. et al. (1998). The Dow Theory : William Peter Hamilton's track record reconsidered. Journal of Finance, 53, 4, 1311–1333.CrossRefGoogle Scholar
Chapman, R.J., Gordon, T.J. & Speed, C.A. (2001). Pensions, funding and risk. B.A.J. 7, 605686.Google Scholar
Collins, T. (1982). An exploration of the immunization approach to provision for unit-linked policies with guarantees. J.I.A. 109, 241284.Google Scholar
Cootner, P. (1964). The random character of stock market prices. MIT Press, U.S.A.Google Scholar
Courtault, J.-M., Kabanov, Y. et al. (2000). Louis Bachelier: on the centenary of Theorie de la Speculation. Mathematical Finance, 10, No. 3, 341353.CrossRefGoogle Scholar
Cowles, A. III (1933). Can stock market forecasters forecast? Econometrica, 1, 309342.CrossRefGoogle Scholar
Cox, J.C., Ingersoll, J.E. & Ross, S.A. (1985). A theory of the term structure of interest rates. Econometrica, 53, 385408.CrossRefGoogle Scholar
Cox, J.C., Ross, S.A. & Rubenstein, M. (1979). Option pricing: a simplified approach. Journal of Financial Economics, 7, 229263.CrossRefGoogle Scholar
Cramer, H. (1976). Half a century with probability theory: some personal recollections. The Annals of Probability, 4, No. 4, 509546.CrossRefGoogle Scholar
Defoe, D. (1719). The anatomy of exchange alley: or a system of stock-jobbing proving that scandalous trade as it is now carry'd on, to be knavish in its private practice, and treason in its publick. Pamphlet, London.Google Scholar
Dimson, E., Marsh, P. & Staunton, M. (2000). The millennium book: a century of investment returns. ABN AMRO/LBS.Google Scholar
Dimson, E. & Mussavian, M. (1998). A brief history of market efficiency. European Financial Management, 4, No. 1, 91103.CrossRefGoogle Scholar
Dimson, E. & Mussavian, M. (1999). Three centuries of asset pricing. Journal of Banking and Finance, 23(12), 17451769.CrossRefGoogle Scholar
Dimson, E. & Mussavian, M. (2002). Foundations of finance. Forthcoming three volume collection of foundational papers.Google Scholar
Dormoy, E. (1873). Theorie mathematique des jeux de hazard. Journal des Actuaries Francais, 2, 3857.Google Scholar
Douglas, C. (1929). The statistical groundwork of investment policy. T.F.A. 12, 173228.Google Scholar
Ellis, C. (1997). The investor's anthology: original ideas from the industry's greatest minds. Wiley, New York.Google Scholar
Exley, C.J., Mehta, S.J.B. & Smith, A.D. (1997). The financial theory of defined benefit pension plans. B.A.J. 3, 835966.Google Scholar
Fagan, C. (1977). Maturity guarantees under investment-linked contracts. Presented to the Society of Actuaries in Ireland on 11 November 1977.Google Scholar
Fama, E. (1970). Efficient capital markets: a review of theory and empirical work. Journal of Finance, 25, 383417.CrossRefGoogle Scholar
Haberman, S. & Sibbett, T. (1995). History of actuarial science. Pickering & Chatto, London. [Bachelier's Theory of speculation is reproduced in Vol. VII, 15–78 (Boness's translation).]Google Scholar
Hawawini, G. & Keim, D. (2000). The cross section of common stock returns: a review of the evidence and some new findings. In Security market imperfections in world equity markets. Keim, D. & Ziemba, W. (Editors), Cambridge University Press.Google Scholar
Hsu, D-A., Miller, R.B. & Wichern, D.W. (1974). On the stable Paretian behavior of stock-market prices. Journal of the American Statistical Association, 69, No. 345, Applications Section, 108113.CrossRefGoogle Scholar
Jensen, F. & Meckling, W. (1976). Theory of the firm, managerial behavior, agency costs and ownership structures. Journal of Financial Economics, 3, 305360.CrossRefGoogle Scholar
Kendall, M. (1953). The analysis of economic time series — Part I: Prices. Journal of the Royal Statistical Society, 96, Part I, 1125.CrossRefGoogle Scholar
Keynes, J.M. (1925). An American study of shares versus bonds as permanent investment. Supplement to The Nation and the Athenaeum, 2 May.Google Scholar
Lo, A., Mamayasky, H.et al. (2000). Foundations of technical analysis: computational algorithims, statistical inference and empirical implementation. Journal of Finance, 55, 4, 1701–1770.CrossRefGoogle Scholar
Loretan, M. & Phillips, P.C.B. (1994). Testing covariance stationarity of heavy-tailed time series. Journal of Empirical Finance, 1, 211248.CrossRefGoogle Scholar
Lucey, B. & Whelan, S.F. (2001). A promising timing strategy in equity markets. Journal of the Statistical & Social Inquiry Society of Ireland. (to appear)Google Scholar
Makeham, W. (1869). On the theory of annuities certain. JIA. 14, 189199.Google Scholar
Mandelbrot, B.B. (1963). The variation of certain speculative prices. The Journal of Business, 36, 394419.CrossRefGoogle Scholar
Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7, 7791.Google Scholar
Markowitz, H. (1959). Portfolio selection: efficient diversification of investments. New York. Wiley & Sons.Google Scholar
Merton, R. (1973a). Theory of rational option pricing. Bell Journal of Economics and Management Science, 4, 141182.CrossRefGoogle Scholar
Merton, R. (1973b). An intertemporal capital asset pricing model. Econometrica, 41, 867887.CrossRefGoogle Scholar
Miller, M.H. (1977). Debt and taxes. Journal of Finance, 32.Google Scholar
Miller, M.H. & Modigliani, F. (1961). Dividend policy, growth and the valuation of shares. The Journal of Business, 34, 411413.CrossRefGoogle Scholar
Modigliani, F. & Miller, M.H. (1958). The cost of capital, corporation finance and the theory of investments. American Economic Review, 48, 261297.Google Scholar
Müller, U.A., Dacorogna, M.M., Olsen, R.B. & Pictet, O.V. (1998). Heavy tails in high-frequency financial data. In A practical guide to heavy tails: statistical techniques and application. Editors: Adler, R.J., Feldman, R.E. & Taqqu, M.S., Birkhäuser, U.S.A.Google Scholar
Murray, A. (1930). The compilation of price index numbers and yield statistics relative to stock exchange securities. T.F.A. 13, 97134.Google Scholar
Plerou, V., Gopikrishnan, P.et al. (1999a). Scaling of the distribution of price fluctuations of individual companies. Physics Review E60, 65196529.Google Scholar
Plerou, V., Gopikrishnan, P.et al. (1999b). Scaling of the distribution of fluctuations of financial market indices. Physics Review E60, 53055316.Google Scholar
Regnault, J. (1863). Calcul des chances et philosophie de la Bourse. Mallet-Bachelier et Castel, Paris.Google Scholar
Roll, R. (1977). A critique of the asset pricing theory's tests: Part I: On past and potential testability of the theory. Journal of Finance, 35, 129176.Google Scholar
Sharpe, W. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. Journal of Finance, 19, 425442.Google Scholar
Soldofsky, R. (1966). A note on the history of bond tables and stock valuation models. Journal of Finance, 21, 1, 103111.CrossRefGoogle Scholar
Stambaugh, R. (1982). On the exclusion of assets from tests of the two-parameter model: a sensitivity analysis. Journal of Financial Economics, 10, 3, 237268.CrossRefGoogle Scholar
Sullivan, R., Timmermann, A. & White, H. (2001). Dangers of data mining: the case of calendar effects in stock returns. Journal of Econometrics, 105 (1), 249286.CrossRefGoogle Scholar
Taqqu, M. (2001). Bachelier and his times: a conversation with Bernard Bru. Finance and Stochastics, 5(1), 332. Also, a slightly expanded version with the same title in Mathematical Finance - Bachelier Congress 2000. Geman, H., Madan, D., Pliska, S.R. & Vorst, T. (Eds.), Springer (2001).CrossRefGoogle Scholar
Tepper, I. (1981). Taxation and corporate pension policy. Journal of Finance, 36, 113.CrossRefGoogle Scholar
Tobin, J. (1958). Liquidity preference as a behavior toward risk. Review of Economic Studies, 25, 6586.CrossRefGoogle Scholar
Todhunter, R. (1901). The Institute of Actuaries text-book on compound interest and annuities certain. Layton, London.Google Scholar
von Neumann, J. & Morgenstern, O. (1944). Theory of games and economic behavior. Princeton University Press, Princeton, New Jersey.Google Scholar
Working, H. (1934). A random-difference series for use in the analysis of time series. Journal of the American Statistical Association, 29, 1124.CrossRefGoogle Scholar
14
Cited by

Send article to Kindle

To send this article to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about sending to your Kindle. Find out more about sending to your Kindle.

Note you can select to send to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be sent to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

A Primer in Financial Economics
Available formats
×

Send article to Dropbox

To send this article to your Dropbox account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Dropbox.

A Primer in Financial Economics
Available formats
×

Send article to Google Drive

To send this article to your Google Drive account, please select one or more formats and confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your <service> account. Find out more about sending content to Google Drive.

A Primer in Financial Economics
Available formats
×
×

Reply to: Submit a response

Please enter your response.

Your details

Please enter a valid email address.

Conflicting interests

Do you have any conflicting interests? *