Keywords:
financial crisis, rational markets, market efficiency, behavioral finance, modern finance, paradigm, financial regulation
JEL Classification:
G01, G11, G14, G18, G32
Working Paper
Abstract
The chief intellectual assumptions behind financial regulation are that capital market are efficient and market participants act rationally. These assumptions have always been subject to some challenge and their empirical verification occupy a large portion of modern finance literature. Nevertheless, they have been the leading financial markets theory during the decades preceding the 2007-8 crisis. The crisis has shown that modern theory does not allow for solid risk assessment and reliable macroeconomic forecasting. Such challenges suggest that modern finance may be facing a paradigm crisis. In this paper, we take the measures to such crisis. The reaction of the regulators to the financial crisis was immediate and massive, but the reforms they brought about were built on top of the same theoretical framework that supported the pre-crisis environment. On one side, we suggest that a debate must be opened to assess how to move forward from the current mainstream paradigm; on the other side, we concede that today there are no viable alternative that can replace the current paradigm. Finally, we invite to challenge the rationale behind new financial regulation based on models that have failed in the past. The goal of the regulators should not be to eliminate the financial crises, nor the financial risk, but rather to facilitate an environment in which risk assessment is made more reliable.
Author
- Massimiliano Neri
Director del Finance Research Center de la Universidad Francisco Marroquin y de Moody’s Analytics. Además, es profesor de Administración del Riesgo Financiero en OMMA (Centro de Estudios Superiores Online de Madrid Manuel Ayau) y profesor visitante en la Universidad Francisco Marroquín. Anteriormente fue Gerente de Ventas en IBM y Gerente de Desarrollo de Negocios en ILOG. Neri es Ingeniero en Sistemas, con maestría, egresado de Università di Bologna, Italia y cuenta con PhD en Economía Aplicada por University Rey Juan Carlos, España.
