Thermo-Finance: The Link Between Financial Engineering and Financial Stability

Abstract

Schinckus (2010) defines econophysics as a new approach which applies physics concepts to understand economic and financial phenomena; this paper belongs to the school of econophysics. The goal of this paper is to apply the three principles of thermodynamics into the field of finance. The qualitative results obtained are the three principles of financial engineering which describe the evolution, the dispersion, and the measure of risk inside the financial system. We push further the reasoning to describe the three axiomatic laws of finance which put the three principles observed into motion. Finally, we describe the three financial engineering construction rules that have to be respected, in order to create financial engineering products and solutions that are sustainable over time, thereby enhancing systemic financial stability.

Keywords: Econophysics; Financial stability; Axiomatic laws of finance; Principles of financial engineering ; Construction rules of financial engineering.

JEL Classification: G00