Putting Economics (Back) into Quantitative Models
36 Pages Posted: 14 Nov 2005
Date Written: November 8, 2005
I review the shortcomings and assumptions of the present state of the art quantitative finance models. I show that simple concepts such as demand and supply from microeconomics, and aggregates from macroeconomics are not only useful, but essential for building robust models without giving up the concept of arbitrage pricing. Finally, an economically motivated simple model of the term structure is built and its parameters related to intuitively appealing macro variables.
Suggested Citation: Suggested Citation