An Engine, Not a Camera: How Financial Models Shape Markets / Edition 1

An Engine, Not a Camera: How Financial Models Shape Markets / Edition 1

by Donald Mackenzie
     
 

In An Engine, Not a Camera, Donald MacKenzie argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical models of markets, were not simply external analyses but intrinsic parts of economic processes.

Paraphrasing Milton Friedman,

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Overview

In An Engine, Not a Camera, Donald MacKenzie argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical models of markets, were not simply external analyses but intrinsic parts of economic processes.

Paraphrasing Milton Friedman,
MacKenzie says that economic models are an engine of inquiry rather than a camera to reproduce empirical facts. More than that, the emergence of an authoritative theory of financial markets altered those markets fundamentally. For example, in 1970,
there was almost no trading in financial derivatives such as "futures." By June of
2004, derivatives contracts totaling $273 trillion were outstanding worldwide.
MacKenzie suggests that this growth could never have happened without the development of theories that gave derivatives legitimacy and explained their complexities.

MacKenzie examines the role played by finance theory in the two most serious crises to hit the world's financial markets in recent years:
the stock market crash of 1987 and the market turmoil that engulfed the hedge fund
Long-Term Capital Management in 1998. He also looks at finance theory that is somewhat beyond the mainstream -- chaos theorist Benoit Mandelbrot's model of "wild"
randomness. MacKenzie's pioneering work in the social studies of finance will interest anyone who wants to understand how America's financial markets have grown into their current form.

The MIT Press

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Product Details

ISBN-13:
9780262134606
Publisher:
MIT Press
Publication date:
05/01/2006
Series:
Inside Technology Series
Edition description:
New Edition
Pages:
392
Product dimensions:
6.00(w) x 9.00(h) x 0.81(d)
Age Range:
18 Years

Table of Contents

1Performing theory?1
2Transforming finance37
3Theory and practice69
4Tests, anomalies, and monsters89
5Pricing options119
6Pits, bodies, and theorems143
7The fall179
8Arbitrage211
9Models and markets243
App. AAn example of Modigliani and Miller's "Arbitrage proof" of the irrelevance structure to total market value277
App. BLevy Distributions279
App. CSprenkle's and Kassouf's equations for warrant prices281
App. DThe Black-Scholes equation for a European option on a non-dividend-bearing stock283
App. EPricing options in a binomial world285
App. FRepo, haircuts, and reverse repo289
App. GA typical swap-spread arbitrage trade291

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