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Basic Approach To Reading The Interrelations Of Finance And Economics: Theoretical Perspectives

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Basic approach to reading the interrelations of finance and economics: theoretical perspectives

The reading, the interrelations of finance and economics: theoretical perspectives, leads us to understand concepts such as neoclassical finance, the no arbitrage principle, tying asset pricing to the simple proposition that there are no free lunches in financial markets, it could be said those concepts are the cornerstones of modern finance and, in particular, of market efficiency. In an efficient market prices reflect the information possessed by the market and, as a consequence, trading schemes using commonly available information to beat the market are doomed to fail. I mean, you cannot win at market.

In general, finance is about valuing the cash flows that extend over time and are uncertain, and the basic intuition is the absence of arbitrage. According to the author, an arbitrage opportunity is a money pump, an example, is the opportunity to borrow at one rate and lend at a higher rate. Obviously, everyone would like to do such operations indefinitely, that's not reality. Then the definition of “An arbitrage opportunity is an arbitrage portfolio with no negative payoffs and with a positive payoff in some state of nature ”. It is for this reason that there is no arbitrage in finance. The author presents three statements are equivalent, as they explain each other, these are: “1) no Arbitrage, 2) the existence of a positive linear pricing rule that prices all assets and 3) the existence of an optimal demand for some agent who prefers more to less” .

Which is a parallel to the theory of supply and demand which is the theoretical basis of the economy, in which a balance of these generate models capable of describing the movements of the economics. In finance involved is different in concepts such as intuition about the role of information in financial markets, and how it´s find the basic intuition of efficient markets, that how the author shows that neoclassical theory provides an explanation for some of the anomalies on which behavioral finance has been fixated. Then, to include intuition in a data-driven model is very complicated, and vanish the actual effect of the basic intuition in finance.

In conclusion, although it is not correct to see the finances only as an aspect of the economy, the economy is highly related to finance, as at present, with the markets of existing values, it is necessary to master modern economic theory and its application on problems of interest in finance. As well as ongoing developments in the area of finance will help enrich the existing economic models.


Stephen A. Ross: Neoclassical Finance. 2004

Stephen A. Ross: Neoclassical Finance. 2004


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