At the outset let me confess that I am not a financial economist and have neither taught a course on the subject nor published any research article on it. Perhaps it is my background in econometrics, and the presumption that econometrics is the panacea for most of the problems in financial economics, that I am asked to speak before financial economists. As finance is a part of economics and financial economics has become a new and flourishing area within economics I must, however, admit that I could not but pay some attention to what is happening in this area. In addition, in the last few years when I asked my students at the Indian Institute of Management, Bangalore, to submit term papers for my course on econometrics, some of them chose topics in finance and educated me on the subject.
Another reason why mainstream economists pay some attention to financial economics is because financial economists seem to draw excess returns compared to the mainstream economists, almost with the same human capital endowment or even less of it. This is, what I would like to call, "the financial economics premium puzzle". A brilliant former student of mine was making good money in the stock market employing nonlinear models based on chaos theory and was neglecting his research and studies. He pointed out another dimension of this equity premium puzzle quite succinctly.
I asked him if he would combine his interest in stock market with his academic goal of getting a Ph.D. degree and work on the stock price modeling as his thesis topic. His reply was: "Sir, I would like to submit a good thesis and not a bad one. If my model of how the stock market works is good, and on the basis of some limited amount of live testing I believe it is, I would rather use it and make money on the market than make it public. And if it is not good, I would, of course, not like to submit it for Ph.D." |
